Aggregate Supply (AS)

• Aggregate supply is defined as the total output produced in an economy at a given price level over a given period of time.

 
The aggregate supply curve shows that as price level increases, the real national output rises, due to the fact suppliers within an economy will be more willing to supply with the profit incentive of more money. An easy way to remember the shape of this curve is ‘supply to the sky’.
 
A movement along the AS curve will be down to changes in price level alone. As the price level increases, there is an expansion in supply (movement up the AS curve). On the other hand, if the price level were to fall, there would be a contraction in supply (signified by a movement down the AS curve).
 
There may also be a shift in the AS curve, due to changes in supply conditions. This can either be to the left or the right, and is shown in the diagrams below:

Rise in AS

Fall in AS

• The short-run aggregate supply (SRAS) curve only takes into account the period of time instantly after the price level is manipulated. Therefore, it assumes that supply conditions such as productivity and production costs are constant.  In the short-run, at least one factor of production (FoP) is fixed.

 

• The long-run aggregate supply (LRAS) curve on the other hand displays the potential supply for an economy in the long term. This is because all factors of production are variable given a period of time.