In economics, aggregate supply is the total supply of goods and services by a national economy during a specific time period. There are at least two different versions of this concept in Keynesian economics. Economics (from the Greek οίκος [oikos], family, household, estate, and νομος [nomos], custom, law, hence household management and management of the state) is a social science that studies the production, distribution, trade and consumption of goods and services. ... Keynesian economics (pronounced KAYNzian), also called Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ...

1. Sometimes the "Z curve" in the "Keynesian cross" diagram is referred to as "aggregate supply." This curve often represents the total amount of production that corresponds to the total amount of income in a country during a specific time period. Because the sum of all income received corresponds to the sum of all production, this is drawn as a 45 degree line. In this diagram, the desired total spending line crosses this Z curve, determining the equilibrium level of production, income, and spending. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... Look up equilibrium in Wiktionary, the free dictionary. ...

2. In neo-Keynesian theory seen in many textbooks, an "aggregate supply and demand" diagram is drawn that looks like a typical Marshallian supply and demand diagram. The aggregate supply (AS) curve is usually drawn as upward-sloping in the short run, since the quantity of aggregate production supplied (Q^s) rises as the average price level (P) rises. Alfred Marshall Alfred Marshall (July 26, 1842–July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

There are two main reasons why Q^s might rise as P rises, i.e., why the AS curve is upward sloping:

A. In neoclassical-influenced textbooks, it is necessary to raise prices to motivate profit-seeking firms to increase output. This is because of diminishing returns and thus rising marginal costs that arise because one or more of the inputs or factors of production does not change in the short run and is assumed to be fully employed at all times. Usually this is fixed capital equipment. The AS curve is drawn given some nominal variable, such as the nominal wage rate. Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... In economics, diminishing returns is the short form of diminishing marginal returns. ... Factors of production are resources used in the production of goods and services in economics. ... In politics, a capital (also called capital city or political capital — although the latter phrase has an alternative meaning based on an alternative meaning of capital) is the principal city or town associated with its government. ...

In the short run, the nominal wage rate is taken as fixed. Thus, rising P implies higher profits that justify expansion of output. In the neoclassical long run, on the other hand, the nominal wage rate varies with economic conditions. (High unemployment leads to falling nominal wages -- and vice-versa.) This is used to justify a vertical aggregate supply curve in the long run. Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

B. An alternative model starts with the notion that any economy involves a large number of heterogeneous types of inputs, including both fixed capital equipment and labor. Both main types of inputs can be unemployed. The upward-sloping AS curve arises because (1) some nominal input prices are fixed in the short run (as in the neoclassical theory) and (2) as output rises, more and more production processes encounter bottlenecks. A bottleneck is literally the neck of a glass or pottery bottle. ...

At low levels of demand, there are large numbers of production processes that do not use their fixed capital equipment fully. Thus, production can be increased without much in the way of diminishing returns and the average price level need not rise much (if at all) to justify increased production. The AS curve is flat.

On the other hand, when demand is high, few production processes have unemployed fixed inputs. Thus, bottlenecks are general. Any increase in demand and production induces increases in prices. Thus, the AS curve is steep or vertical.

This implies an AS curve which has the shape of a rounded backwards "L".

See also

• Aggregate demand
• List of economics topics
• Supply shock

In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... This aims to be a complete list of the articles on economics. ... A supply shock is an event that suddenly changes the price of a commodity or service. ...

External links

• Elmer G. Wiens: Classical & Keynesian AD-AS Model - An on-line, interactive model of the Canadian Economy.