aggregate supply


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Aggregate Supply

The total supply of goods and services in an economy at a given overall price and time. Aggregate supply is tracked on an aggregate supply curve, which plots supply against price. When prices are rising, this indicates that the aggregate supply is inadequate to meet aggregate demand; this leads businesses to expand their operations and produce more goods and services. In the short term, aggregate supply is responsive to price movements, but, in the long term, it only increases in response to increased productivity.

aggregate supply

the total amount of domestic goods and services supplied by businesses and government, including both consumer products and capital goods. Aggregate supply interacts with AGGREGATE DEMAND to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME (see AGGREGATE SUPPLY SCHEDULE).

In the short term, aggregate supply will tend to vary with the level of demand for goods and services, although the two need not correspond exactly For example, businesses could supply more products than are demanded in the short term, the difference showing up as a build-up of unsold STOCKS (unintended INVENTORY INVESTMENT). On the other hand, businesses could supply fewer products than are demanded in the short term, the difference being met by running down stocks. However, discrepancies between aggregate supply and aggregate demand cannot be very large or persist for long, and generally businesses will offer to supply output only if they expect spending to be sufficient to sell all that output.

Over the long term, aggregate supply can increase as a result of increases in the LABOUR FORCE, increases in CAPITAL STOCK and improvements in labour PRODUCTIVITY.

See ACTUAL GROSS NATIONAL PRODUCT, POTENTIAL GROSS NATIONAL PRODUCT, ECONOMIC GROWTH.

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