Lesson 9 of 17
Aggregate supply (AS) refers to the total amount of goods and services produced by an economy’s businesses.
Aggregate supply curve shows the quantity of goods and services that firms choose to produce and sell (quantity of real GDP supplied) at each price level.
We are concerned about the aggregate supply curve under three time frames, namely, very short run aggregate supply (VSRAS), short run aggregate supply (SRAS), and long run aggregate supply (LRAS).
In the very short run, wages, input costs as well as prices are assumed to be constant. The firms can increase and decrease their output without affecting the prices. The VSRAS curve is perfectly elastic.
In the long run, the aggregate supply curve (LRAS) is perfectly inelastic. This is because in the long run it is assumed that the real output of the economy is at its full potential with full employment. The price levels will have no effect on the aggregate supply because wages, input costs, etc. will change proportionally with a change in the price levels.
In the short run, aggregate supply curve (SRAS) is upward sloping. The firms are willing to produce and supply more at higher price levels. This assumes that in the short-run wage rates and input prices are unchanged. They are sticky in the short run and do not adjust fast enough to the changes in price levels.
