Definition
Aggregate supply
The total output produced in an economy at all possible price levels, over a specific time period, ceteris paribus.
Differentiation of short-run and long-run in macroeconomics
In microeconomics, we saw that:
- In the short-run, at least one factor of production is fixed.
- In the long-run, all factors of production are variable.
A similar differentiation of short-run and long-run exists in macroeconomics:
- In the short-run, the cost of factors of production (especially wages) are fixed (they are not affected by changes in price levels).
- In the long-run, the costs of factors of production are variable (they adjust to the price level).
Short-run aggregate supply (SRAS) curve
Definition
Short-run aggregate supply (SRAS)
The total output produced in an economy at all possible price levels, when the costs of factors of production are fixed, ceteris paribus.
- In the short-run, the costs of the factors of production are fixed.
- Therefore, producers across the economy increase their production of output (real GDP) only if there is an increase in the price level (PL). This is because:
- An increase in price level (PL) increases the revenues firms receive from selling their goods and services, while their fixed costs (e.g., wages, rent) remain unchanged (in the short run).
- This results in higher profit margins for firms, incentivising them to increase their production.
