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. Aggregate Demand

    Aggregate demand is the total amount of goods and services demanded ...
  2. Monetary Aggregates

    Money aggregates are broad categories measuring the total value ...
  3. Aggregate Hours

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

    A supply curve is a representation of the relationship between ...
  5. Supply Shock

    A supply shock is an unexpected event that changes the supply ...
  6. Quantity Supplied

    The quantity supplied is a term used in economics to describe ...
Related Articles
  1. Tech

    Top Problems with Financial Data Aggregation

    A new front in personal finance technology—data aggregation—seeks to make our financial lives easier. But here's why it may be stalling.
  2. Insights

    How supply and demand affects inelastic goods

    Find out how the laws of supply and demand function for goods and services that are considered highly inelastic, including goods not yet discovered.
  3. Investing

    How Long Can Gas Stay Cheap?

    The current gas prices means a lot for the economy and our pockets. Let's explore how long we can expect gas prices to be low, what affects gas prices, and what changes might be in store.
  4. 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.
  5. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

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

    Why it is important to follow crude oil inventories

    Discover what oil inventories are, how they are communicated, and what important insights they provide into the state of the oil market.
  7. Insights

    What is the Quantity Theory of Money?

    Take a look at the tenets, assumptions and challenges of monetarism's principal theory, the quantity theory of money.
RELATED FAQS
  1. How can the Fed increase aggregate demand?

    Learn about the Federal Reserve's role in increasing aggregate demand, and find out why fiscal policy tends to be more effective ... Read Answer >>
  2. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  3. How are aggregate demand and GDP related?

    See why aggregate demand and gross domestic product (GDP) are necessarily the same thing, according to Keynesian macroeconomic ... Read Answer >>
  4. What factors influence a change in supply elasticity?

    Learn about the supply elasticity of goods and services, some factors that influence supply elasticity and how these factors ... Read Answer >>
  5. 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 >>
  6. 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 >>
Trading Center