Glossary

Aggregate Supply

Aggregate supply is the total amount of goods and services that all the firms in an economy are willing to produce at each overall price level. It is the economy-wide version of a single firm's supply curve — the whole country's output rather than one product like coffee. Whether higher prices actually draw out more output, though, depends entirely on the time horizon you are looking at.

In the short run, aggregate supply (SRAS) slopes upward. Some costs — especially wages — are sticky and slow to adjust, so when the price level rises, firms' selling prices climb faster than their costs, profit margins widen, and they expand production. In the long run, aggregate supply (LRAS) is vertical at potential output ( $Y^*$ ) — the full-employment level of output determined by an economy's labor, capital, and technology. Once wages and all other prices have fully adjusted, the price level no longer affects how much the economy can produce. SRAS shifts when input costs or productivity change; LRAS shifts only when the economy's real resources or technology change.

Y = Y^{*} \quad \text{(long run)}

Long-run aggregate supply

In the long run, output

Y

is pinned to potential output

Y^*

— the level the economy produces at full employment. Because

Y^*

does not depend on the price level, the LRAS curve is vertical, and only real factors (labor, capital, technology) can move it.

Short-run aggregate supply (SRAS): The upward-sloping supply curve that holds while some costs (notably wages) are sticky. A higher price level temporarily raises output.
Long-run aggregate supply (LRAS): The vertical supply curve at potential output $Y^*$ . In the long run, output is set by real resources, not the price level.
Potential output: The level of real GDP an economy produces when all resources are fully and efficiently employed — the position of the LRAS curve.
Aggregate demand: The total spending on final goods at each price level, written $AD = C + I + G + NX$ . Where it crosses aggregate supply sets the economy's output and price level. See aggregate demand.