Aggregate Supply - a schedule showing the level of real domestic output which will be produced at each price level.

There are three ranges on the aggregate supply curve

Horizontal Range

• High unemployment

• Not full-employment of resources

• No inflation (no increase in price level)

Intermediate Range

• Within intermediate range is point of full-employment

• Both output and price level increase because industries are beginning to use less efficient capital

• In the intermediate range of the aggregate supply curve, per unit production costs rise and firms must receive higher production prices for their output to be profitable.  In this range a rising real output is accompanied by a higher price level.

Vertical Range

• Increase in price level is not matched by increase in output

• Industries are over-employing resources

• There is no increase of real output to absorb some of the increased spending

Determinants of Aggregate Supply

• Rightward shifts in the production possibilities curve translates into rightward shifts in the aggregate supply curve
• Increases of supply of domestic resources decreases per unit production costs.  Anything that decreases per unit production costs causes rightward shift in aggregate supply.  Domestic resources include:

1. Land

2. Labor

3. Capital

4. Entrepreneurial ability

• Prices of imported resources

If prices of imported resources fall, then there will be an increase in aggregate supply

• Exchange rate fluctuations alter price of imported resources

If dollar appreciates (price of foreign currency falls) Americans will be able to buy more foreign currency with each American dollar.  Hence, American producers face lower dollar price for resources.  Therefore, there is an increase in aggregate supply.

• Market Power

Market power is the ability to set a price above the price that would occur in a competitive situation.  OPEC controlled most of oil industry and thus, when they increased price of oil, they were able to make aggregate supply curve shift leftward because they increased per unit production costs.

Unions are another example.  The stronger the union, the more likely they will be able to increase wages.  This leads to rising production costs, which decreases aggregate supply.

• Changes in productivity

Productivity = real output / input

An increase in productivity increases output without increasing production costs

• Changes in legal-institutional environment

Taxes are seen by businesses as a cost.  Therefore, when the government increases taxes, per unit production cost rises.

It is usually costly for businesses to comply with government regulation.  Thus, regulation increases per unit production costs.

See price determination (aggregate supply-aggregate demand)

Subscribe to our newsletter!  Enter your email address here:

Get Stock Quote: Enter Symbol(s) Symbol Lookup My Portfolio Our Privacy Vow

Like our intro movie?  Download the Short Run's screen saver.