Aggregate Supply Defined
Definition
Aggregate supply (AS): the total quantity of goods and services that all producers in an economy are willing and able to supply at each average price level over a period of time.
Short-run AS (SRAS): total output supplied while factor prices, such as wages, are fixed.
Long-run AS (LRAS): total output supplied once factor prices have fully adjusted, set by the economy's productive capacity.
Unpacking the Definition
- Total output is the combined supply of all producers in the economy.
- At a given price level means supply relates to the average price level, not one good's price.
- Over a period of time means aggregate supply is a flow, not a stock.
Key Idea
- Aggregate supply reflects the economy's productive capacity and the costs firms face.
- It is analysed in both the short run and the long run.
Why the Definition Matters
- Aggregate supply determines how far a rise in demand raises output rather than prices.
- It reflects the economy's capacity to produce.
- Together with aggregate demand it sets the equilibrium price level and real output.
- Whether spare capacity persists is disputed: classical economists say it disappears in the long run, while Keynesians say it can linger.
Example
- Suppose aggregate demand rises by £10bn in two different economies.
- In an economy with plenty of spare capacity, firms supply much of the extra £10bn, so real output rises with little price change.
- In an economy near full capacity, firms cannot supply much more, so the price level rises instead.
- This shows why aggregate supply shapes the outcome of any change in demand.
AS Versus Market Supply
- Aggregate supply is the total supply of the whole economy, not one firm or market.
- It responds to the average price level, not the price of a single good.
Exam technique
- Define AS as the total output firms will supply at a given average price level.
- Use the correct macro axes: average price level and real output.
Common Mistake
- Do not define aggregate supply as one firm's or one market's supply.
- Do not label the macro axes price and quantity, since they are average price level and real output.
Self review
- What is aggregate supply?
- At what is aggregate supply measured?
- What does aggregate supply reflect about the economy?
- What are the correct axes on a macro AS diagram?
