What is Aggregate Supply?
Aggregate Supply (AS) is the total quantity of goods and services that producers are willing to supply at different price levels. Unlike short-run AS (which can rise with prices due to sticky wages), long-run AS is vertical—production depends on capital, technology and labor, not prices.
Aggregate Supply is the total output producers supply at each price level. Short-run AS slopes upward (higher prices incentivize more production), while long-run AS is vertical at the natural rate of output.
Step-by-step worked examples
In the short-run, a price increase from 100 to 120 leads producers to increase output from $2T to $2.5T. In the long-run, the same price increase has no effect on output. Why?
Short-run: Sticky wages → higher prices = higher real wage costs for hiring Producers think costs fell, so they hire more and produce more Long-run: Wages adjust to new price level Output returns to natural rate—AS is vertical
Technology improves, increasing productivity by 20%. How does this shift aggregate supply?
LRAS shifts RIGHT (natural output increases) At each price level, producers can now supply more Economic growth without inflation
An oil shock increases input costs. How does this affect short-run AS?
SRAS shifts LEFT (higher costs reduce willingness to supply) At each price level, less is now supplied Stagflation risk (low growth + inflation)
Flashcards
Quick quiz
Q1.In the short-run, higher prices lead to…
Q2.A supply shock increases input costs. SRAS…
Q3.Why is long-run AS vertical?
Q4.Technology improves. Long-run AS…
The full card deck, worked steps and AI-tutor support for “What is Aggregate Supply?” are in Notek — study by hand before your exam.
Common mistakes
Confusing short-run AS with long-run AS. — Correct: SR-AS slopes up (sticky wages); LR-AS is vertical (wage adjustment).
Thinking price changes shift the AS curve. — Correct: Price changes move along AS. Productivity/cost changes shift the curve.
Assuming output always depends on price. — Correct: LR output is determined by resources & technology, not price level.
Forgetting supply shocks. — Correct: Oil shocks, bad harvests, pandemics all shift AS left.
FAQ
What is Aggregate Supply?
The total quantity of goods and services producers supply at each price level.
What's the difference between short-run and long-run AS?
Short-run AS slopes upward (sticky wages); long-run AS is vertical (wages adjust to prices).
What causes AS to shift?
Changes in productivity, input costs, wages, supply shocks—anything except price level.
How do supply shocks affect the economy?
Negative shocks (oil crisis) shift SRAS left → stagflation (low growth + high inflation).