What is an Aggregate Supply Curve?

//What is an Aggregate Supply Curve?
What is an Aggregate Supply Curve? 2017-09-30T05:40:55+00:00

Definition: The aggregate supply curve is an economic graph that indicates how many goods and services an economy’s firms are willing and able to produce in a given period.

What Does Aggregate Supply Curve Mean?

What is the definition of aggregate supply curve? The ASC is the sum of all the supply curves for individual goods and services. Therefore, as the individual AS, it represents a direct relationship between the price and the quantity supplied.

In the long-term, the ASC is perfectly vertical because it represents an economy’s potential output with full employment of an economy’s resources. In the short-term, the ASC is upward sloping because as the prices increase, and so do the costs. The ASC is shifts when a change in supply, working capital, natural resources, or occurs.

Let’s look at an example.

Example

In the short-term, the aggregate supply curve follows the pattern of the individual supply curves, which is upward sloping. This happens because as the prices rise, consumers spend less money because of the higher costs. At the lower levels of consumer demand, producers supply a greater amount of output due to the law of diminishing returns, thereby keeping the average price stable. However, as the demand increases, producers raise their prices, thus lowering demand.

Consequently, a rise in the production costs shifts the ASC to the right, whereas a decrease in the production costs shifts the ASC to the left. Other determinants that influence the ASC in the short-run are taxes, wages, the price of raw materials, the quantity of labor and the quantity of capital employed.

In the long-term, the ASC is perfectly vertical proving that changes in aggregate demandcan only temporarily change the total output of an economy. In fact, the supply curve in the long-term is influenced by changes in the labor, capital, and technology because it is assumed that the economy is using all of its resources optimally.

Summary Definition

Define Aggregate Supply Curve: ASC means a graph showing the overall supply of goods and services that producers are willing and able to produce in the economy.