Aggregate Supply Curve

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Aggregate Supply Curve

Aggregate supply is the sum of total of output of all goods and services produced and offered for sale by all the producers taken together at various price levels. In brief, aggregate supply is the quantum of national output (GDP) which the producers are willing to produce at different levels of prices.

Aggregate supply is the total output of goods and services that the firms wish to produce, assuming they can sell all they wish to sell at the going price level.

Aggregate supply involves production decisions of all the producers in an economy. Productions involve purchase of inputs and hiring of factor services. Thus, the decisions regarding output and supply do take into explicit account the prevailing input prices and changes therein due to increased input demands for producing larger output. We can thus analyse price-supply relationship on the basis of (i) factor or input prices being fixed or constant and (ii) input prices change in response to change in their demand.

The aggregate supply curve that relates the quantity to aggregate output supplied various price levels can thus be drawn on the basis of these fixed )or constant) input prices, as well as on the basis of fully adjusted and changed input prices.

The Short-Run Aggregate Supply (SRAS) Curve shows the price-supply relationship when the quantity of output that firms wish to produce and sell at each price level is based on the assumptions that prices of all inputs remain constant. Thus, short period assumptions provide for unchanged input prices and the prices-supply relationship is shown by the short-run aggregate supply (SRAS) curve.

The long-run is a period that allows for changes and adjustment. The Long-Run Aggregate Supply (LRAS) Curve thus shows the quantity of output that all firms would like to produce and sell after the price level of output and input prices have fully adjusted to influences causing these price changes. Here, we are confine our analysis to the short-run aggregate supply curve.


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