2.3.3 - Aggregate supply (AS)
- Syllabus
- 2018
- Topic
- 2.3.3
- Level
- AS
Learning objectives
2.3.31a - concept of AS. characteristicsThe concept of AS. characteristics2.3.31b - AS curve. of ASThe AS curve. of AS2.3.31c - distinction between a movement along and a shift of the AS curveThe distinction between a movement along and a shift of the AS curve.2.3.32a - Factors influencing SRAS. Changes in: (SRAS) • costs of raw materials and energy •Factors influencing SRAS. Changes in: (SRAS); costs of raw materials and energy; exchange rates; tax rates.2.3.33a - Different shapes of AS curve: (LRAS) • Keynesian • classicalDifferent shapes of AS curve: (LRAS); Keynesian; classical.2.3.33b - Factors influencing LRAS. Changes in: • the state of technology • productivity •Factors influencing LRAS. Changes in:; the state of technology; productivity; education and skills; government regulations and tax; demography and net migration; competition policy.
What aggregate supply measures
Aggregate supply (AS) is the total real output that firms in an economy plan to produce at each average price level during a given period.
| Axis | Macroeconomic variable |
|---|---|
| vertical | average price level |
| horizontal | real national output/income/GDP |
AS must be interpreted with a time horizon. Short-run aggregate supply reflects current input costs and some fixed resources; long-run aggregate supply reflects the economy's productive capacity.
AS is economy-wide planned production, not the supply of one product. The horizontal axis is real output, not the quantity of a single good.
Reading an AS curve
A conventional short-run AS curve slopes upward: at a higher average price level, firms can find it profitable to raise real output while some wages and other input costs adjust more slowly.
As spare capacity is used, bottlenecks and rising marginal costs can make further output expansion increasingly inflationary. Long-run curve shapes are treated separately because they represent capacity rather than this short-run response.
Choose a price level on the vertical axis, move horizontally to the AS curve and then down to read planned real output.
The AS curve is a relationship between price level and real output under stated conditions; it is not a time-series path showing how the economy automatically evolves.
Movement along or shift of AS
| Change | Diagram response |
|---|---|
| average price level changes, other determinants fixed | movement along the existing AS curve |
| production costs or productive capacity change | the entire relevant AS curve shifts |
A higher price level causes an extension along an upward-sloping AS curve; a lower price level causes a contraction. Lower production costs shift SRAS right, while greater productive capacity shifts LRAS right.
A price-level change alone does not shift AS. Raw-material costs, taxes, exchange rates, productivity and resources are non-price determinants that can shift it.
What shifts short-run aggregate supply
| Change | Firms' costs | SRAS shift, other things equal |
|---|---|---|
| raw-material or energy prices rise | rise | left |
| raw-material or energy prices fall | fall | right |
| currency depreciates for an import-dependent economy | imported inputs become dearer | left |
| currency appreciates | imported inputs become cheaper | right |
| indirect/business production taxes rise | rise | left |
| relevant tax rates fall | fall | right |
With AD fixed, SRAS left raises the price level and reduces real output; SRAS right lowers the price level and raises real output.
The size depends on import dependence, firms' ability to absorb costs, spare capacity, duration and simultaneous AD changes. A net energy exporter may gain income from higher world prices even while domestic users face higher costs.
An exchange-rate change can affect both SRAS through imported input costs and AD through net trade. Keep the two channels separate before combining them.
Classical and Keynesian LRAS
| Model | LRAS shape | Central implication |
|---|---|---|
| classical | vertical at full-employment/potential output | in the long run, the price level does not change real productive capacity; AD changes affect price level rather than long-run real output |
| Keynesian | horizontal with substantial spare capacity, then upward sloping, finally vertical at full employment | AD can raise real output with little price pressure at first; inflationary pressure strengthens as capacity is approached |
On the Keynesian curve, the effect of an AD shift depends on the economy's starting segment. Near the vertical section, extra demand mainly raises the price level; on the horizontal section, it mainly raises real output.
Neither model says LRAS is relatively elastic at full employment. At the full-employment capacity limit, further AD cannot raise long-run real output without a rightward capacity shift.
What shifts long-run aggregate supply
| Factor | Rightward LRAS channel |
|---|---|
| technology | enables more output from available inputs |
| productivity | raises output per unit of input |
| education and skills | strengthens human capital and occupational mobility |
| regulation and tax | well-designed changes can improve incentives, entry and investment; burdensome design can constrain capacity |
| demography and net migration | a larger or more employable labour force expands potential output |
| competition policy | stronger contestability can improve efficiency, innovation and resource allocation |
A rightward LRAS shift raises potential real output and, with AD fixed, tends to lower the equilibrium price level. A leftward shift reduces capacity and tends to raise the price level.
Effects depend on labour-force participation, skill match, implementation, time lags and whether policies genuinely improve productive efficiency. Net migration can shift both LRAS through labour supply and AD through spending.
A temporary fall in an input price mainly shifts SRAS; LRAS shifts only when the economy's sustainable productive capacity changes.