Definition
The term aggregate supply refers to the total of all goods and services that businesses in a nation plan to sell at a specific point in time. Aggregate supply is typically illustrated as a line depicting the quantity of goods and services supplied at various price points.
Explanation
Also referred to as domestic final supply, aggregate supply (AS) is the total amount of goods and services that an economy can sell at a specific point in time. Aggregate supply is usually depicted as an upward sloping line, indicating the quantity of goods and services sold at various price points as shown in the accompanying illustration.
The aggregate supply curve is upward sloping because the cost of inputs is typically fixed in the short run, and as output increases excess production capacity is exhausted. In the short run, companies cannot add new capacity to increase production. The only alternative is to utilize the existing capacity by adding more shifts or extending hours of operation.
In the long run, companies have more options since they are able to increase supply by adding more factories and add to existing capacity. This leads to the following concepts:
Short-Run Aggregate Supply (SRAS): in the short-run, aggregate supply will react to higher demand by increasing the use of current production processes since a new factory cannot be built to increase production.
Medium-Run Aggregate Supply (MRAS): new capital can be introduced to increase production; however, wages associated with labor cannot be increased as quickly. This is referred to as sticky wages.
Long-Run Aggregate Supply (LRAS): in the long-run both capital and wages are controllable. Technology improvements can also be introduced to make processes more efficient.
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