Business, Legal & Accounting Glossary
Aggregate supply is used to measure the amount of services and goods that are generated in an economy at a fixed overall price level. It has been observed that the relationship between the level of the general price level and aggregate supply is normally positive.
A rise in prices is assumed to be an indication to businesses to start the expansion of production activities in order to satisfy higher strata of aggregate demand. It is normally assumed that an expansion of aggregate supply in an economy is initiated by an upsurge in demand.
Short-run aggregate supply is used to get an indication of the complete planned output of an economy in cases where prices keep changing but productive capacity and financial worth of factor inputs like the state of technology and wage rates stay same.
Long-run aggregate supply provides complete planned output in circumstances where prices, as well as wage rates, are liable to change. It is thought of as an indication of the potential output of a particular country. Long-run aggregate supply is related to the concept of production possibility frontier.
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.
Aggregate demand is the combined volume of goods and services that are wanted in a particular economy. This is done on the basis of fixed time lengths and prices. Aggregate demand is also known in economic terms as total spending.
Change in supply is a term in economics that is used to signify a situation whereby suppliers of certain goods and services change their usual levels of production. Change in supply can result in a number of conditions like usage of technological innovations that increases the efficiency of production processes.
The consumer price index is employed to measure the weighted mean of a group of goods and services meant for consumers. Examples, in this case, include transportation, medical care, and food. Alterations in prices are primarily used for calculations.
In economics, cost-push inflation is a situation where the general price level goes up. The main reason behind cost-push inflation is an increase in factors like raw materials and the cost of wages. There are other causes like a decrease in aggregate supply in a particular economy.
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This glossary post was last updated: 29th March, 2020 | 7 Views.