Aggregate Supply

What Aggregate Supply covers

Aggregate supply is examined in Unit AS 2, Managing the National Economy. It covers why short-run aggregate supply slopes upwards, factors that shift short-run aggregate supply, movements along and shifts in aggregate supply, from the short run to the long run, what determines long-run aggregate supply and keynesian and neoclassical views of long-run aggregate supply.

The 6 subtopics

Each one has its own page. CCEA AS Economics students sit this topic in the first year.

• Why short-run aggregate supply slopes upwardsAggregate supply and describe the short-run aggregate supply curve, profit-margin reason why short-run aggregate supply slopes upwards and short-run aggregate supply curve become steeper as real output rises.Open →
• Factors that shift short-run aggregate supplyDepreciation of the domestic currency affect short-run aggregate supply, effect of an increase in indirect taxes on producers and government subsidy to producers affect short-run aggregate supply.Open →
• Movements along and shifts in aggregate supplyWords the two diagrams needed to show.Open →
• From the short run to the long runLong-run aggregate supply curve related to the production possibility frontier.Open →
• What determines long-run aggregate supplyHow improvements in education and training affect long-run aggregate supply, how net investment in capital raises long-run aggregate supply and how technological progress affects long-run aggregate supply.Open →
• Keynesian and neoclassical views of long-run aggregate supplyHorizontal section of the Keynesian long-run aggregate supply curve flat and point on which the Keynesian and neoclassical views agree.Open →

What you need to know

Answer each one before you reveal it.

Take Aggregate Supply further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Short-run aggregate supply vs Long-run aggregate supply

  Short-run aggregate supply: the relationship that holds while money wages and other input prices are fixed. Long-run aggregate supply: the relationship once all input prices have adjusted, set by productive capacity.

• The neoclassical long-run curve vs The Keynesian long-run curve

  The neoclassical long-run curve: drawn vertical at full capacity, so extra spending affects only the price level. The Keynesian long-run curve: drawn flat at low output, so extra spending raises output while spare capacity remains.

• A movement along aggregate supply vs A shift in aggregate supply

  A movement along aggregate supply: the response to a change in the general price level alone. A shift in aggregate supply: the response to a change in costs or capacity, at every price level.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Define aggregate supply and describe the short-run aggregate supply curve, naming both axes.

   Model answer

   Aggregate supply is the total quantity of goods and services that firms in an economy are willing and able to produce at each general price level in a given period. The short-run aggregate supply curve is drawn with the general price level on the vertical axis and real national output on the horizontal axis, and slopes upwards from left to right. A higher general price level is therefore associated with a larger real output supplied, provided the prices of inputs have not yet adjusted.

2. 2

   Explain the profit-margin reason why short-run aggregate supply slopes upwards.

   Model answer

   In the short run many input prices are fixed by contract: wages are set for a year or more, rents and leases are agreed in advance and materials may be bought forward. If the general price level rises while these costs stay put, the price a firm receives for its output rises relative to the cost of producing it, so the profit on each extra unit increases. Firms respond by raising output, taking on overtime and additional shifts, so a higher price level brings forth a larger real output.

3. 3

   How do rising marginal costs at high levels of capacity contribute to the upward slope of short-run aggregate supply?

   Model answer

   As output expands towards the limits of existing capacity, firms have to use their least efficient machines, pay overtime rates, hire less suitable workers and pay more to secure scarce materials, so the cost of producing each extra unit rises. Firms will only accept those higher costs if the price they receive rises too. A higher general price level is therefore needed to call forth a larger real output, which is what gives the curve its positive slope.

4. 4

   Why is the stickiness of money wages central to the short-run aggregate supply curve?

   Model answer

   Wages are the largest single cost for most firms, and they are typically fixed for a period by contracts, pay settlements and the practical difficulty of renegotiating frequently. While money wages are fixed, a rise in the general price level lowers the real cost of labour to the firm, making extra production profitable. If money wages instead adjusted instantly to every price change, real costs would never fall and there would be no reason for output to respond to the price level at all.

5. 5

   How can a misperception of prices by workers help produce an upward-sloping short-run aggregate supply curve?

   Model answer

   Workers observe the money wage they are offered immediately, but learn about the general price level only with a delay. When prices rise, a higher money wage can be mistaken for a higher real wage, so more labour is willingly supplied and firms can expand output. Once workers realise that prices have risen as much as their pay, the extra labour supply is withdrawn. The response therefore holds only in the short run, which is exactly the period the short-run curve describes.

6. 6

   What distinguishes the short run from the long run in aggregate supply analysis?

   Model answer

   The short run is the period during which at least one input price, most importantly the money wage, has not yet adjusted to a change in the general price level. The long run is the period after all input prices have fully adjusted, so that real costs are back where they started. Because of that difference, output responds to the price level in the short run but is determined by the quantity and productivity of the factors of production in the long run.

What is inside Levo

Six ways to work the same material.

Aggregate Supply revision questions

Is Aggregate Supply examined at AS in CCEA Economics?

Yes. It sits in Unit AS 2, which you take in the first year, so it is on the AS paper as well as counting towards the full A level.

What does Aggregate Supply cover in CCEA AS-Level Economics?

6 subtopics: why short-run aggregate supply slopes upwards, factors that shift short-run aggregate supply, movements along and shifts in aggregate supply, from the short run to the long run, what determines long-run aggregate supply and keynesian and neoclassical views of long-run aggregate supply. Each one has its own page with questions and model answers.

How is Aggregate Supply organised?

By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.