1. Aggregate Supply Some key questions to answer today What do we mean by ‘aggregate supply’? What does the aggregate supply curve show? Why does it matter?

2. Defining aggregate supply Aggregate Supply (AS) measures the volume of goods and services produced within the economy at a given overall price level. There is a positive relationship between AS and the general price level. Rising prices are a signal for businesses to expand production to meet a higher level of AD. An increase in demand should lead to an expansion of aggregate supply in the economy.

3. Short Run Aggregate Supply Curve Price Level P2P2 P1P1 SRAS O Q1Q2Real output This shows the relationship between aggregate output and the average price level – it assumes that wage rates are constant

4. What factors affect the supply of goods? Like this car How could we increase the numbers of cars being produced – and how could we improve their quality?

5. Shifts in the AS curve can be caused by the following factors: changes in size & quality of the labour force available for production changes in size & quality of capital stock through investment technological progress and the impact of innovation changes in factor productivity of both labour and capital changes in unit wage costs (wage costs per unit of output) changes in producer taxes and subsidies changes in inflation expectations - a rise in inflation expectations is likely to boost wage levels and cause AS to shift inwards

6. Long Run Aggregate Supply Long run aggregate supply is determined by the productive resources available to meet demand and by the productivity of factor inputs (labour, land and capital). In the short run, producers respond to higher demand (and prices) by bringing more inputs into the production process and increasing the utilisation of their existing inputs. Supply does respond to change in price in the short run.

7. In the long run, we assume that supply is independent of the price level The productive potential of an economy (measured by LRAS) is driven by improvements in productivity and by an expansion of the available factor inputs... a)more firms b)a bigger capital stock c)an expanding active labour force... and so on. As a result we (classically) draw the long run aggregate supply curve as vertical.