Loading the player...

What is 'Aggregate Supply'?

Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price level in a given period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level.

BREAKING DOWN 'Aggregate Supply'

Rising prices are typically an indicator that businesses should expand production to meet a higher level of aggregate demand. When demand increases amid constant supply, consumers compete for the goods available and, therefore, pay higher prices. This change in dynamic induces firms to increase output to sell more goods. The resulting supply increase causes prices to normalize and output to remain elevated.

Causes of Aggregate Supply Shifts

A shift in aggregate supply can be attributed to a number of variables. These include changes in the size and quality of labor, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes and subsidies and changes in inflation. Some of these factors lead to positive changes in aggregate supply while others cause aggregate supply to decline.

For example, increased labor efficiency, perhaps through outsourcing or automation, raises supply output by decreasing the labor cost per unit of supply. By contrast, wage increases - the case in many areas of the United States in 2017 - place downward pressure on aggregate supply by increasing production costs.

Short Run vs. Long Run

In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process. In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency. Instead, the company ramps up supply by getting more out of its existing factors of production, such as assigning workers more hours or increasing the use of existing technology.

In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency. Such improvements include increases in the level of skills and education among workers, technological advancements and increases in capital. Certain economic viewpoints, such as the Keynesian theory, assert that long-run aggregate supply is still price elastic up to a certain point. Once this point is reached, supply becomes insensitive to changes in the price level.

RELATED TERMS
  1. Supply

    Supply is a fundamental economic concept that describes the total ...
  2. Aggregate Limit

    The aggregate limit is the maximum amount an insurer will pay ...
  3. Aggregate Hours

    Aggregate hours refer to the total sum of hours worked by all ...
  4. Law Of Supply

    Law of supply is a microeconomic law, stating that, all other ...
  5. Supply Management

    Supply management is the act of identifying, acquiring and managing ...
  6. Neutrality Of Money

    An economic theory that states that changes in the aggregate ...
Related Articles
  1. Insights

    4 Factors That Shape Market Trends

    Discover the four major factors that shape market trends: Government, international transactions, speculation/expectation, and supply and demand. These areas are all linked as expected future ...
  2. Personal Finance

    Why You Should Consider A Career In Supply Chain Management

    Supply chain managers ensure that increasingly global companies can coordinate distant sources of materials, labor, and manufacturing to successfully bring products to market.
  3. Investing

    3 Ways To Lower Gas Prices

    Gasoline is expensive. From increasing overall supply to lowering demand, there are a few ways gas prices could drop.
  4. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  5. Investing

    Central Bankers' Role in Keynesian Economics

    Learn about the role of monetary policy in Keynesian economics, and examine how central banks impacted aggregate demand in the aftermath of the 2008 crisis.
  6. Insights

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  7. Personal Finance

    Supply Chain Management Jobs Are Booming

    There has been huge growth in supply chain management, both in the number of positions open and the range of responsibilities assigned to those positions.
  8. Tech

    Best Advisor Technology for Understanding Clients

    Advisors can leverage new technology to dramatically improve their workflow and overall profitability over time. Here are four solutions that will help.
  9. Investing

    These 5 Countries Move the Supply of Oil

    Learn which countries are the largest source of change in the global supply of oil. Oil prices crashed in 2014 as supply increased and demand dropped.
RELATED FAQS
  1. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  2. How Do Fiscal and Monetary Policies Affect Aggregate Demand?

    Learn about the impact fiscal and monetary policy have on aggregate demand, and discover how the government influences economic ... Read Answer >>
  3. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
  4. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  5. How does the law of supply and demand affect the oil industry?

    Learn how the law of supply and demand affects the oil industry. Supply and demand determines the price of oil, which drives ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center