The Aggregate Supply Curve
The aggregate supply curve shows the relationship between a nation's overall price level, and the quantity of goods and services produces by that nation's suppliers. The curve is upward sloping in the short run and vertical, or close to vertical, in the long run.

Net investment, technology changes that yield productivity improvements, and positive institutional changes can increase both short-run and long-run aggregate supply. Institutional changes, such as the provision of public goods at low cost, increase economic efficiency and cause aggregate supply curves to shift to the right.

Some changes can alter short-run aggregate supply (SAS), while long-run aggregate supply (LAS) remains the same. Examples include:

  • Supply Shocks - Supply shocks are sudden surprise events that increase or decrease output on a temporary basis. Examples include unusually bad or good weather or the impact from surprise military actions.
  • Resource Price Changes - These, too, can alter SAS. Unless the price changes reflect differences in long-term supply, the LAS is not affected.
  • Changes in Expectations for Inflation - If suppliers expect goods to sell at much higher prices in the future, their willingness to sell in the current time period will be reduced and the SAS will shift to the left.

The Aggregate Demand Curve
The aggregate demand curve shows, at various price levels, the quantity of goods and services produced domestically that consumers, businesses, governments and foreigners (net exports) are willing to purchase during the period of concern. The curve slopes downward to the right, indicating that as price levels decrease (increase), more (less) goods and services are demanded.

Factors that can shift an aggregate demand curve include:

  • Real Interest Rate Changes - Such changes will impact capital goods decisions made by individual consumers and by businesses. Lower real interest rates will lower the costs of major products such as cars, large appliances and houses; they will increase business capital project spending because long-term costs of investment projects are reduced. The aggregate demand curve will shift down and to the right. Higher real interest rates will make capital goods relatively more expensive and cause the aggregate demand curve to shift up and to the left.
  • Changes in Expectations - If businesses and households are more optimistic about the future of the economy, they are more likely to buy large items and make new investments; this will increase aggregate demand.
  • The Wealth Effect - If real household wealth increases (decreases), then aggregate demand will increase (decrease)
  • Changes in Income of Foreigners - If the income of foreigners increases (decreases), then aggregate demand for domestically-produced goods and services should increase (decrease).
  • Changes in Currency Exchange Rates - From the viewpoint of the U.S., if the value of the U.S. dollar falls (rises), foreign goods will become more (less) expensive, while goods produced in the U.S. will become cheaper (more expensive) to foreigners. The net result will be an increase (decrease) in aggregate demand.
  • Inflation Expectation Changes - If consumers expect inflation to go up in the future, they will tend to buy now causing aggregate demand to increase. If consumers' expectations shift so that they expect prices to decline in the future, t aggregate demand will decline and the aggregate demand curve will shift up and to the left.
Short and Long-run Macroeconomic Equilibrium

Related Articles
  1. Insights

    Explaining Aggregate Supply

    Aggregate supply is the total supply of goods and services an economy produces in a given time period.
  2. Insights

    What's Aggregate Demand?

    Aggregate demand is a macroeconomic term describing the total demand in an economy for all goods and services at any given price level in a given time period.
  3. Insights

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  4. Investing

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  5. Investing

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  6. Investing

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
  7. Tech

    Advisors: Stay Relevant with Data Aggregation

    Advisors wanting to remain competitive should consider embracing data aggregation tech, which many clients expect. Here's the lowdown on the trend.
  8. Investing

    Understanding the Inverted Yield Curve

    An inverted yield curve occurs during the rare times when short-term interest rates are higher than long-term interest rates.
  9. Investing

    The Impact of an Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.
Frequently Asked Questions
  1. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  3. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  4. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
Trading Center