UK Accounting Glossary
Aggregate supply is the total supply in an economy for a given length of time. Aggregate supply is expressed as the relationship between a general price level and the value of production (usually GDP or GNP). Aggregate supply is graphed either to represent the short-run aggregate supply curve (i.e. SRAS) whereas prices increase, companies are motivated to increase production. In this case, the aggregate supply is represented by a line sloping upward from left to right. On the other hand, a vertical aggregate supply curve represents the long-run aggregate supply curve (i.e. LRAS) where production stays the same even when prices increase.
Economists express the aggregate supply equation as follows:
Y = Yo + a(P – Pe)
Y = Aggregate supply
Yo = Natural level of production (i.e. full employment level of output)
a = Positive constant
P = Price
Pe = Expected price
Aggregate supply is affected by consumer demand, the availability of labour, the availability of materials, the efficiency of production, inflation, and other “natural” economic phenomena. Aggregate supply is also affected by governments which often intervene with pricing regulations, production regulations, taxes and tariffs, and other legislation. The concept of aggregate supply is credited to John Maynard Keynes whose theories on aggregate supply and aggregate demand are the dominant foundation of modern macroeconomics.
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This glossary post was last updated: 4th February 2020.