Name: Mahrukh

Class: LLB (Part 1)

Section: A
Roll Number: 1592

Aggregate Supply (AS)

Aggregate supply is the total supply of goods and services in an economy or a relationship
between the price level and the equilibrium quantity of real GDP demanded.

Aggregate Supply (AS) Curve

The aggregate supply curve represents the quantity of real GDP that is supplied by the
economy at different price levels. As the price of a good rises, sellers' per unit costs of
providing good don’t change, and so sellers are willing to supply more of good ‐ therefore,
the upward slope of the supply curve for good.

However, the aggregate supply curve, is defined in terms of the price level. Increases in the
price level will increase the price that producers can get for their products and thus induce
more output. But an increase in the price will also have a second effect; it will eventually lead
to increases in input prices as well, which, ceteris paribus, will cause producers to cut back.

Because of the aforementioned reasons, it is uncertain as to whether the economy will supply
more real goods. Therefore, it has become necessary to distinguish between two types of
aggregate supply curve, which are:

 Short-Run aggregate supply curve

 Long-run aggregate supply curve

Short-Run Aggregate Supply Curve (SRAS)

It is a graphical model that shows the positive relationship between the aggregate price level
and amount of aggregate output supplied in an economy.

 If short-run aggregate curve or SRAS curve shifts to the right, then a greater quantity
of real GDP is produced at every price level.

 If the aggregate supply curves to the left, then a lower quantity of real GDP is
produced at every price level.

Factors Causing Shift In SRAS

A second factor that causes shift in aggregate supply curve is economic growth.

Economic Growth
In economics the term productivity is described as how much output can be produced with a
given quantity of labour and capital. One measures of this is output per worker, or GDP per
capita.

When the productivity level is higher, it causes the short-run aggregate supply to shift right
because with better productivity, the firms and businesses can produce a greater quantity of
output at every price level. Therefore, the natural level of real GDP increases.

Long Run Aggregate Supply Curve

It is a curve that depicts the relationship between price level and real GDP that would be
supplied if all prices, including nominal wages, were fully flexible; price can change along
the long-run aggregate supply (LRAS), but output cannot because that output reflects the full
employment output.

OR

It can be defined as the period when input prices have completely adjusted to changes in the
price level of final goods.

 The long-run aggregate supply (LRAS) curve would shift to the right if there was an
increase in investment or growth in the size of the labour force.

 The classical view of LRAS states that aggregate supply is not determined by the
price level or aggregate demand (AD), but is determined by factors of production, –
land, labour, capital, and labour productivity.