Macroeconomics - Aggregate Supply Curve - Essay Example

The aggregate supply function of the economy is also referred to as the total supply of the economy which shows the total supply of goods and services that the firms are willing to supply at given price levels. It also shows the capacity of the firms of the economy and the fact that the firms can supply the economy with the appropriate level of goods and services in order to satisfy the demands of the economy.

Aggregate supply curves are made on the basis of the long and short term which depicts the total supply function of the firms of the economy both in the long term and in the short term for the economy. There can be some shifts in the aggregate supply curve for the economy which can be attributed to a number of different factors and variables affecting the economy. These factors can be many some of which may be the change in the size and quality of labor, the mere fact that the labor size has changed that more and more labor is available to the firms for the production of their goods and services, or that the labor which is already available to the economy has gained more and more skills due to which it has become easier to produce more for the economy. Other factors can be the technology change or it can be said that technological innovations can cause a shift in the aggregate supply curve of the economy.  Increases in wages, increases in production costs, changes in producer taxes and subsidies, and changes in inflation can also be some of the driving factors in the shifting of the aggregate supply curve for the economy.

Different schools of thought have different views of economics and therefore they have different approaches toward the determining aggregate supply of the economy that is to be made to the economy. Aggregates supply is the function of aggregate availability of labor and other resources in the given time period and the price levels for the production of those goods and services that provide the aggregate supply of those goods and services to the economy.

Short Run Aggregate Supply Curve

The supply side of the performance of the economy is the main determinant of the aggregate supply of the economy. Short-run aggregate supply depicts the productive capacity of the economy and the costs of production of each sector.

There may be a shift in the aggregate supply cure and this can be caused by the following factors:

• Changes made in the supply size and quality of the labor force that is available to the economy.
• Changes in size and quality of capital stock through investment.
• Technological progress and the impact of innovation.
• Changes in the productivity of factors – both labor and capital.
• Changes in the wage costs per unit. i.e. wage costs per unit of output.
• Changes in producer taxes and subsidies.
• Changes occurring to the inflation expectations. A rise in inflation expectations is likely to boost wage levels and in effect cause the aggregate supply curve toward the inward shifts.

Long Run Aggregate Supply

Long-run aggregate supply is determined by the productive resources available to meet demand and by the estimated productivity of factor inputs are Land, Labor, and capital.

There is a clear distinction between the short-run and long-run aggregate supply cures. In the short run aggregate supply curve is dependent on the price levels for a particular output and therefore increase in price levels affects the supply of goods and services in the economy whereas it is not true for long-term aggregate supply as they are thought to be independent of price levels in the long term. The productive potential of the economy, in the long run, is mostly driven by the improvements to be made in the productivity levels and by the expansion of the available factor inputs. Expansion of the available factor inputs can be made through the realization of more firms, a bigger and much better capital stock, and an increase in the number of the skilled labor force, etc. due to these reasons long-run aggregate supply curve is made vertically on the graphs.

The classical model of economics defines the aggregate supply curve as being a vertical line at the full employment level of real production.

The early Keynesian view describes the aggregate supply curve to be a parallel curve to the horizontal axis. i.e. a horizontal curve. It shows that the price level will remain the same over the time period and the firms will have to manage their supply according to the available price level prevailing in the economy.

The newer Keynesian view describes the aggregate supply curve in two aspects. i.e. fixed money wage and variable money wage. According to the newer Keynesian view aggregate supply curve is the upward-slopping curve at different wage levels for the economy.

The supply-side school of thought in economics defines the aggregate supply of the economy based on the fact that the aggregate supply is affected by the quality of labor and that much higher prices are paid to the more skilled labor as compared to the less skilled or unskilled labor.