AGGREGATE SUPPLY (AS) is the total quantity of final goods and services that can be supplied (produced) in the economy at different price levels.
The dependence of the supply volume on the average price level in the country is called the AS CURVE.
The nature of the AS curve is influenced by:
a) price factors;
b) non-price factors. The former change the volume of aggregate supply (moving along curve A8). The second (changes in technology, resource prices, volume of resources used, taxation of firms, market structure, etc.) lead to a shift of the AS curve.
The AS curve can be static and dynamic.
Unlike the static one, the dynamic AS curve is used to assess the impact of inflation rates on changes in national output.
The shape of the AS curve is interpreted differently by classicists and Keynesians. Thus, changes in the value of aggregate supply under the influence of the same factor may be different, depending on what period (short or long) is taken into account.
The classical model looks at the economy in the long run.
Long term is the period during which resource prices have time to adjust to commodity prices so that the economy maintains full employment.
The long-term AS curve reflects the country's production capabilities and is constructed based on the following conditions:
a) the volume of production is determined only by the number of factors of production and available technology and is not determined by the price level;
b) changes in factors of production and technology are carried out slowly;
c) the economy operates at full employment of production factors and, therefore, the volume of production is equal to potential;
d) prices and nominal wages are flexible, changes maintain equilibrium in markets.
Under these conditions The AS curve is vertical. It characterizes the natural (potential) level of production volume (Figure 12), i.e., the volume of production under conditions of full employment, in which the resources of the economy are fully used, and unemployment is at the natural level.
Figure 12 – Long-run aggregate supply curve
Fluctuations in aggregate demand change the price level. For example, when the supply of money decreases, the AD 1 curve shifts to the left to the position. Economic equilibrium moves from point E1 to point E 2, but the amount of production AS remains at the same level.
Shifts in the aggregate supply curve in the long run are possible only when the value of production factors and technology changes.
In the short term, such a model is unacceptable. Keynesian model describes the economy in the short term and is based on the following premises:
a) underemployment in the economy;
b) commodity prices and nominal wages are rigid.
Under these conditions, the aggregate supply curve is horizontal. Fluctuations in aggregate demand affect production volume; the price level does not change. Modern concepts explain the difference between the short-term AS curve and the long-term curve by market imperfection, i.e., price inflexibility and imperfect information.
The short-run aggregate supply curve has three segments:
– horizontal (Keynesian) – I;
– intermediate (ascending) – II;
– vertical (classical) – III.
All three sections of the aggregate supply curve are presented in Figure 13.
Figure 13 – Sections of the short-term aggregate supply curve
The intersection of the AD and AS curves determines the equilibrium price level and the equilibrium volume of national production (Figure 14).
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Figure 14 – Equilibrium in the goods market
3 Keynesian model of macroeconomic equilibrium. Changes in balance
Macroeconomic equilibrium is the achievement of an equilibrium state in the economy in which aggregate demand is equal to aggregate supply. D. Keynes proved that macroeconomic equilibrium is compatible with unemployment, inflation and a fall in output.
In the Keynesian model, the study of macroeconomic equilibrium involves constructing a consumption function in the following axes: income is plotted on the x-axis, and total consumption expenditures are plotted on the y-axis.
The bisector dividing the angle in half means equality of income and consumption expenditures. The theoretical structure shown in Figure 15 is called the “Keynes cross”.
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Figure 15 – “Keynes Cross”
The intersection of the bisector and the curve CC 1 at point B means that all income is consumed. To the left of point B are negative savings (living on debt), since consumption costs exceed income, to the right are positive savings.
If aggregate expenditures include not only personal consumer expenditures of the population, but also investments of entrepreneurs, government purchases, and expenditures on net exports, then the line of the consumption function will coincide with the aggregate demand curve AD. In turn, the aggregate supply line AS can be represented by the bisector right angle, because every increase in income is the result of an increase in production volume. Thus, the “Keynes cross” is a specification of the AD-AS model.
To the left of the macroeconomic equilibrium point, aggregate demand exceeds aggregate supply, and production volume is less than equilibrium. Increased demand is met by unplanned reductions in firms' inventories, which creates the conditions for increased employment and output. Thus, this is an inflation zone.
To the right of the point of macroeconomic equilibrium, the volume of production exceeds the equilibrium value. This means that buyers buy less goods than firms produce. Unsold products take the form of increasing inventories. Therefore, this is an unemployment zone.
A change in any component of aggregate spending causes a shift in the aggregate demand curve. If the AD curve shifts upward, there is an inflationary gap; downward, there is a deflationary gap.
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Figure 15 – Inflationary and deflationary gaps
Inflation gap– the amount by which aggregate demand (aggregate spending) must decrease in order to reduce equilibrium GNP to the non-inflationary full employment level.
Deflationary (recessionary) gap is the amount by which the aggregate expenditure curve falls below the point of macroeconomic equilibrium achieved under conditions of full employment.
The size of the inflation gap is determined by the formula:
where IR is the value of the inflation gap;
ΔY – amount of increase in income (Y 2 – Y 1)
μ – autonomous expenditure multiplier.
The size of the recession gap is calculated similarly, only with a plus sign.
By analogy with the concept of “aggregate demand,” we can distinguish an aggregate indicator that will reflect the supply side in the national market. We are talking about the category “aggregate supply”. Aggregate offer- the real volume of production in the economy (GDP) that producers are willing and able to offer at each possible price level. Economists argue about the shape of the aggregate supply curve. Typically, the aggregate supply curve is presented in the form of three segments, reflecting the relationship between the price level and the amount of aggregate supply. This relationship can be shown graphically.
On the AS chart, three segments can be distinguished: I - horizontal, or Keynesian, segment; II - vertical, or classic, segment; III - ascending, or intermediate, segment.
For Keynesian segment A typical situation is when the maximum possible volume of national production Qmax has not been achieved. It is obvious that there is an underutilization of production capacity and significant unemployment, i.e. the economy operates under conditions of underemployment and is in a crisis or depression phase of the economic cycle. While in a state of crisis or depression, the economy can increase production volumes without a noticeable increase in prices for manufactured products. An increase in production volumes in the segment up to Q t with practically zero price growth is possible through the use of free economic resources, which, due to the crisis in the economy, “fell out” of the process of social reproduction. All these resources can be involved in production at constant resource market prices. And since entrepreneurs purchase economic resources at fixed prices, their costs of producing a unit of output do not increase as output expands. The level of production costs per unit of production does not actually change, which means that the prices for the goods created will be constant.
Classic site The aggregate supply schedule assumes that the economic system has reached its production possibilities curve, that is, it operates under conditions of full employment of all economic resources. This means that the maximum possible volume of domestic production Q max (GDP patent) has been achieved for a given economy. Thus, the economic system is in the upswing phase of the business cycle. In this area, any change in the price level in the economy will not lead to a change in the real volume of production in the economy.
For your information. The classical portion of the aggregate supply curve was studied by classical economists. According to classical economists, a market economy is characterized by a state of full employment, which is achieved automatically.
Intermediate segment graph AS reflects the situation of a parallel increase in both production volumes and the price level in the economy (the indicators change accordingly from Q 1 to Q max and from P 1 to P 2). Such joint dynamics of these two indicators can be explained for the following reasons. Firstly, the uneven development of the national economy across industries and regions. Full employment is achieved unevenly - in some sectors there may be a shortage of resources, in others, on the contrary, there will be a surplus. The latter will experience stagnation. In the first group of industries, an increase in demand for resources will be accompanied by an increase in prices for production factors, and, consequently, an increase in average costs and prices for finished products. In another group of industries, average costs remain constant. Secondly, the growth of production volumes in the interval from Q 1 to Q max requires the involvement of more and more previously unoccupied economic resources in the reproduction process. As we move forward and approach Q max, the quality of these resources decreases, i.e., they are less productive (than, for example, in the Keynesian sector, when the highest quality and most suitable economic resources were attracted to increase production). Consequently, an increase in production volumes will be associated with rising costs, and consequently, with rising prices.
Until now, the analysis has not taken into account non-price factors of aggregate supply, but has studied the relationship between the price level in the economy and the real volume of products produced in society. The action of non-price factors leads to changes in aggregate supply.
Line AS can change its position on the plane under the influence of non-price factors.
If it shifts to the right, then aggregate supply is said to increase. In this case, at the classic and intermediate stages, there actually is an increase in production volumes at each possible price level. In the Keynesian segment, the price level decreases at each level of production in the economy. If the AS curve shifts to the left to position AS 2, then aggregate supply decreases.
The main non-price factors of aggregate supply have one common property - any shift in the AS curve is always associated with a change in the cost of producing a unit of output. The main non-price factors of aggregate supply include:
1. Current prices for economic resources. An increase in resource prices leads to an increase in production costs, therefore, aggregate supply will decrease and the AS schedule will shift to the left. It should be noted that the price level for economic resources, in turn, also depends on a number of factors. In particular, we can mention the availability of internal resources in the country. As their number increases, the society's CPV will shift to the right, and the AS schedule will shift in the same direction (the aggregate supply will increase). Prices for imported resources and their fluctuations, the degree of monopolization of factor markets, the efficiency of use of economic resources and other factors can affect resource prices and average production costs, and therefore aggregate supply.
2. The level of productivity of economic resources and the effectiveness of the technologies used. Resource productivity is defined as the relationship between an economy's output and resource inputs. If resource productivity increases, then average costs decrease and aggregate Supply increases. The productivity of economic resources depends on many factors - the quantity and quality of other resources, the level of production technology, specialization of resources, the level of qualifications of the workforce, and features of economic management. The introduction of new technologies increases the productivity of production factors and reduces unit costs. This contributes to the growth of aggregate supply, its graph will shift to the right.
3. Level of taxes, subsidies and subsidies. An increase in taxes on the business sector will lead to a decrease in profits. The natural consequence of this will be a reduction in aggregate supply - the AS schedule will shift to the left. Conversely, subsidies and grants to business from the state budget will reduce production costs and stimulate the growth of aggregate supply - the AS graph will shift to the right.
4. Measures of state regulation of the economy. As a rule, the expansion of government participation in economic life is accompanied by an increase in firm costs and a reduction in aggregate supply. This will be most clearly manifested in the case of direct administrative intervention of the state in the economy.
For your information. The impact of non-price factors on aggregate supply will be accompanied by a shift in the AS curve. At the same time, they talk about a change in aggregate supply. If we are talking about price factors (i.e., changes in the price level in the economy), then the amount of aggregate supply will change. The position of the AS graph on the plane will not change here, but the combination “price level in the economy - the volume of GDP offered for sale” will change.
Aggregate offer(AS) is the volume of goods and services produced in the economy as a whole in given year and offered by enterprises on the market to the population, the state and each other at a given price level.
Aggregate supply and its quantity can be depicted graphically using an aggregate supply curve. If we mark the price level (P) vertically and output (Y) horizontally, that is, GDP, then, taking different meanings price level and output, we can construct the aggregate supply curve AS (Fig. 2 Short-Run Aggregate Supply Curve).
In macroeconomic theory, the aggregate supply curve distinguishes three segments that differ from each other in price behavior:
1. horizontal line segment (Keynesian),
2. intermediate line segment (ascending),
3. vertical line segment (classical).
On horizontally m segment of the aggregate supply curve, the price level remains unchanged even if the volume of national production increases.
This is possible if GDP is significantly lower than potential volume. This situation means that the economy has a significant level of unemployment and underutilization of production capacity. As GDP increases, the level of unemployment and capacity underutilization decreases. But this reduction does not lead to an increase in the price level; idle labor and equipment are put into operation at existing prices, and production costs do not change.
As idle resources are exhausted, the level of GDP approaches potential, the level of employment approaches full employment, and the economy begins to function at intermediate segment of the aggregate supply curve. In this segment, rising prices lead to an increase in the scale of production and aggregate supply. Difficulties arise due to lack of resources. And if aggregate demand continues to grow, then aggregate supply will increase if additional resources are found. Demand for resources increases and resource prices rise, leading to higher production costs. Producers will only scale up production if the prices of their products also increase to compensate for the cost of more expensive inputs. All this explains the fact that with an increase in the price level, aggregate supply in the intermediate segment also increases. The growth of production costs underlies the direct relationship between the price level and the amount of aggregate supply.
On vertical(classical) segment of the aggregate supply curve, the price level in the economy increases, but the amount of aggregate supply remains unchanged. GDP has reached full employment levels. The economy is unable to provide additional resources. They are exhausted, therefore, with an increase in aggregate demand, only an increase in prices occurs without an increase in the scale of aggregate supply. There is inflation without economic growth.
The most important non-price factors of aggregate supply:
1. Changes in resource prices. With an increase in prices for resources - wages, interest rates, the cost of raw materials and equipment, rent, etc. - production costs increase. At the same time, the profits of firms decrease, production becomes unprofitable, and incentives to maintain the scale of production at the same level are reduced. As a result, aggregate supply begins to decline.
2. Performance change. Labor productivity is most important factor, affecting production costs, and therefore the amount of aggregate supply. Increased labor productivity occurs as a result of higher qualifications of workers, better organization production, implementation new technology, best use available means of production. When labor productivity increases, production costs are reduced, which leads to increased profits for enterprises and increased incentives to expand the scale of production. Ultimately, aggregate supply increases under the influence of rising labor productivity. This is represented on the graph as a shift of the aggregate supply curve to the right.
3. Changes in legal regulations
occurs when taxes change, the directions and scale of government regulation of the economy change. Thus, subsidies to the private sector reduce production costs. This leads to increased profits and expanded production scale. As a result, the quantity of aggregate supply increases and the aggregate supply curve shifts to the right.
Graphically, the impact of non-price factors on aggregate supply is depicted by a shift of the aggregate supply curve to the left or right (Fig. 3).
Fig.3. Dynamics of aggregate supply under the influence of non-price factors
Aggregate supply is the total quantity of final goods and services produced in an economy (in value terms). The concept is often used synonymously with gross national (or domestic) product.
AS (from English aggregate supply) shows what volume of total output can be offered to the market by producers at different meanings the general price level in the economy. Curve Shape AS interpreted differently in the classical and Keynesian schools. The classical school believes that the aggregate supply curve AS vertical, Keynesian school - either horizontal or having a positive slope.Modern economics believes that at various stages of the reproduction process there can be three forms of the aggregate supply curve, which can be combined into one curve. This is shown graphically in Fig. 12.3.
Rice. 12.3.
a5 has a complex ascending character. This is explained by the fact that the shape of this curve depends on changes in production costs per unit of production, which is understood as the quotient of dividing the cost of all resources used by the total volume of production. Based on this, the aggregate supply curve has three sections:- 1) horizontal, or Keynesian;
- 2) ascending, or intermediate;
- 3) vertical, or classic.
The first section of the curve indicates that the economy is in a state of recession, crisis: there is underutilization of production capacity, a fixed level of prices and wages, a significant level of unemployment, i.e. the economy is characterized by the presence of excess resources that are not used. In this situation, growth in output can be ensured by bringing into play unused resources and without putting pressure on the chain level. Thus, producers can purchase labor and other resources at fixed prices, costs per unit of production will not increase when expanding production, and, therefore, there will be no reason to increase prices for goods.
The second section is characterized by the fact that a change in real production volume correspondingly causes a change in prices. In this area of production, additional resources are involved, and less efficient ones, since the expansion of production implies that some firms will have to use old and less efficient equipment, hire less qualified workers, etc. Therefore, unit costs increase and manufacturers must charge higher prices of goods so that production is profitable.
The third section of the curve reflects the state of the economy in which its production capabilities are almost completely used. This is expressed in full employment, maximum utilization of production capacity and, consequently, in the impossibility of further growth of production. Since the economy works on full power, then any increase in prices will not lead to an increase in real output.
The aggregate supply curve establishes the relationship between the price level and the real volume of national output, other things being equal. But when these conditions (they are called non-price factors of aggregate supply) change, the aggregate supply curve shifts. Non-price factors of aggregate supply include:
o change in prices for resources:
^ internal resources (labor, land, capital, entrepreneurial abilities); external (imported) resources;
^ market dominance;
- o changes in labor productivity;
- o changes in legal regulations:
^ corporate taxes and subsidies;
^ government regulation.
When one or more factors change, the cost per unit of output at a given price level also changes. A decrease in unit costs shifts the aggregate supply curve to the right. Conversely, an increase in unit costs shifts the aggregate supply curve to the left.
Shift of the curve from /15 to L52 in Fig. 12.4 indicates an increase in aggregate supply. In the intermediate and classic segments of the aggregate supply curve, it shifts to the right, indicating that more real national output will be produced than before at a given price level.
Rice. 12.4.
On the Keynesian segment of the curve, an increase in aggregate supply means a decrease in the price level at different
levels of national production. Curve offset from AB] To AB to the left indicates a decrease in aggregate supply. At the intermediate and classic segments of the aggregate supply curve, less real national output will be produced than before at a given price level. On the Keynesian portion of the curve, a decrease in aggregate supply means an increase in the price level at different levels of national output.
Aggregate offer - is the total quantity of goods and services that can be offered by the business and government sectors at a certain price level. Aggregate supply can be equated to the value of the gross national product or to the value of national income:
GNP = ND.
The amount of aggregate supply is also influenced by various factors. Changes in resource prices. Their increase leads to an increase in production costs and, as a result, to a decrease in aggregate supply. Labor productivity growth leads to an increase in production volume and, accordingly, to an expansion of aggregate supply. Changing business conditions (taxes, subsidies). When taxes increase, costs increase and aggregate supply decreases.
Aggregate supply is the total quantity of final goods and services produced in an economy (in value terms). The concept is often used synonymously with gross national (or domestic) product.
AS(from English aggregate supply) shows what volume of total output can be offered to the market by producers at different values of the general price level in the economy. Curve Shape AS interpreted differently in the classical and Keynesian schools. The classical school believes that the aggregate supply curve AS vertical, Keynesian school - either horizontal or having a positive slope.
Modern economics believes that at various stages of the reproduction process there can be three forms of the aggregate supply curve, which can be combined into one curve. This is shown graphically in Fig. 12.3.
Rice. 12.3. Aggregate supply curve.
Aggregate Supply Curve AS has a complex ascending character. This is explained by the fact that the shape of this curve depends on changes in production costs per unit of production, which is understood as the quotient of dividing the cost of all resources used by the total volume of production. Based on this, the aggregate supply curve has three sections:
1) horizontal, or Keynesian;
2) ascending, or intermediate;
3) vertical, or classic.
The first section of the curve indicates that the economy is in a state of recession, crisis: there is underutilization of production capacity, a fixed level of prices and wages, a significant level of unemployment, i.e. the economy is characterized by the presence of excess resources that are not used. In this situation, growth in output can be achieved by bringing into play unused resources and without putting any pressure on the price level. Thus, producers can purchase labor and other resources at fixed prices, costs per unit of production will not increase when expanding production, and, therefore, there will be no reason to increase prices for goods.
The second section is characterized by the fact that a change in real production volume correspondingly causes a change in prices. In this area of production, additional resources are involved, and less efficient ones, since the expansion of production implies that some firms will have to use old and less efficient equipment, hire less qualified workers, etc. Therefore, unit costs increase and manufacturers must charge higher prices of goods so that production is profitable.
The third section of the curve reflects the state of the economy in which its production capabilities are almost completely used. This is expressed in full employment, maximum utilization of production capacity and, consequently, in the impossibility of further growth of production. Since the economy is running at full capacity, any increase in prices will not lead to an increase in real output.
The aggregate supply curve establishes the relationship between the price level and the real volume of national output, other things being equal. But when these conditions (they are called non-price factors of aggregate supply) change, the aggregate supply curve shifts. Non-price factors of aggregate supply include:
Changes in resource prices:
– internal resources (labor, land, capital, entrepreneurial abilities);
– external (imported) resources;
– market dominance;
Changes in labor productivity;
Legal changes:
– corporate taxes and subsidies;
– government regulation.
When one or more factors change, the cost per unit of output at a given price level also changes. A decrease in unit costs shifts the aggregate supply curve to the right. Conversely, an increase in unit costs shifts the aggregate supply curve to the left.
Curve offset from AS1 To AS2 in Fig. 12.4 indicates an increase in aggregate supply. In the intermediate and classic segments of the aggregate supply curve, it shifts to the right, indicating that more real national output will be produced than before at a given price level.
Rice. 12.4. Changes in aggregate supply.
On the Keynesian portion of the curve, an increase in aggregate supply means a decrease in the price level at different levels of national output. Curve offset from AS1 To AS3 to the left indicates a decrease in aggregate supply. At the intermediate and classic segments of the aggregate supply curve, less real national output will be produced than before at a given price level. On the Keynesian portion of the curve, a decrease in aggregate supply means an increase in the price level at different levels of national output.
Total offer – it is the total quantity of goods and services that can be supplied by the business and government sectors at a given price level. Aggregate supply can be equated to the value of the gross national product or to the value of national income:
The amount of aggregate supply is also influenced by various factors. Changes in resource prices. Their increase leads to an increase in production costs and, as a result, to a decrease in aggregate supply. Labor productivity growth leads to an increase in production volume and, accordingly, to an expansion of aggregate supply. Changing business conditions(taxes, subsidies). When taxes increase, costs increase and aggregate supply decreases.
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