Supply is one of the main drivers of all economies. In this article, you will learn the definition of a bundled offer and how it works in the long-term and short-term. Let's also take a look at the aggregate supply curve to see what's causing it to change.
1. Definition of the total offer
2. Or what changes in the additional offer?
3. Long Term Aggregate Supply (LRAS)
4. Short Term Aggregates (SRAS)
5. Frequently Asked Questions
Definition of the total offer
Total supply refers to the total amount of goods and services produced in an economy over a given period and sold at a given price level. This includes the provision of private consumer goods, public and service goods, capital goods and even goods to be sold abroad.
For a simpler definition, we can say that total supply reflects the relationship between the level of production in the economy and price.
When prices rise, it usually means companies have to expand production and supply to keep up with aggregate demand. When demand increases and supply remains constant, consumers must compete for available goods. This in turn increases the price. Increasing the production level to sell more goods normalizes the price. The result is the attainment of balance.
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total supply curve
The aggregate supply curve shows a country's real GDP. In other words, the supplies it offers at different price levels. This curve is based on the premise that as price levels rise, producers can get more money for their products, prompting them to produce even more. However, this increase in the price level will also have a second effect – an eventual increase in input prices (costs of production), which, other things being equal, will prompt producers to reduce production.
Remember that the premise used to construct the aggregate supply curve is different than the premise used to construct supply curves for individual goods. The supply curve for a single good assumes constant input prices. When the price of a product increases, sellers' unit cost of delivering the product does not change, and hence they are willing to increase the supply. For this reason, the supply curve for individual goods typically goes up.
Because there is some uncertainty about whether a country's economy can deliver more real GDP as the price level rises, it has become common to distinguish between two types of aggregate supply curves. These two types are the long-run aggregate supply curve and the short-run aggregate supply curve. By distinguishing them, you have a more realistic idea of the total supply of an economy.
We'll return to these curves in more detail when we consider supply in the context of these timeframes.
Or what changes in replenishment?
There are many variables that can cause the overall supply to change. These include technological innovations, changes in the size and quality of the workforce, changes in production costs, resource availability, subsidies, changes in wages and taxes, and the current level of inflation. These factors can result in positive or negative shifts in the aggregate supply curve.
The aggregate supply curve shifts to the right as labor efficiency increases or production costs decrease, inflation levels decrease, output increases, and access to commodities increases. On the other hand, there is a shift to the left due to an increase in production costs, taxes and higher wage levels or reduced labor efficiency.
The aggregate supply curve shifts right or left based on changes in underlying factors | Source:opentextbc.ca
Long Term Aggregate Supply (LRAS)
Long run is a conceptual time period in which there are no fixed factors of production. Essentially, the period must be long enough to allow wages, prices, and expectations to adjust, but not long enough for physical capital to become a variable input.
With this in mind, we can define long-run total supply (LRAS) as a concept that represents the optimal output that can be produced by an economy when using all of its factors of production and therefore operating at full employment. In the long term, changes in the price level do not affect the overall supply. The curve only changes due to increases in productivity and efficiency. These improvements often include improved skill levels, recent advances in technology, and capital increases. This essentially means that the price in the LRAS is inelastic.
One important thing to note is that there are different economic views of the overall long-term supply. For example, Keynesian LRAS theory states that total long-run supply remains price-elastic only up to a certain point. After that, the offer is practically independent of price changes. In other words, there is a point in the economy where producers of goods and services can expand their capacity. However, once we get to that point, it doesn't matter if the price level goes up or down.
The long run curve
The long-run aggregate supply curve (LRAS) is completely vertical. You're probably wondering why. That's because real GDP over the long term depends on the supply of capital, labour, commodities and other non-price factors. Thus, the quantity produced during this period remains the same regardless of changes in the price level (inelastic price). This is in stark contrast to the single good supply curve, which is upward sloping. In this case, it's because the curve has to do with the prices of goods relative to other goods or services. Firms can therefore use relative prices to increase production.
Say you run a distillery where you mass produce bourbon and gin. When the bourbon price increases, you can focus your resources on distilling more bourbon to take advantage of the price increase, hence the impact of relative price on supply. However, in aggregate supply, all output in the economy is constrained by the availability of land, labour, capital and other resources. Regardless of whether the price level rises or falls, total production must not exceed what the country's available resources allow.
Classical and Keynesian LRAS curves | Source:Wirtschaftshilfe.org
In the figure above you can see how the LRAS curve captures the relationship between the price level, aggregate demand and the flow of output over a period of time. From a classical point of view, the LRAS remains vertical even when the price increases. Under the Keynesian LRAS curve, price is elastic to some extent before becoming vertical and price insensitive.
Short-Term Total Supply (SRAS)
The total short-run supply refers to the total production of goods and services available in an economy at different price levels while some factors of production and resources are fixed. This means that certain capital-intensive resources are almost impossible to reach in the short term. Not even when companies increase their supply due to rising prices, hire more workers or lengthen the working day. These capital-intensive resources include things like offices, new machines, and extra-skilled workers.
There is no specific unit of time associated with the short term period. It could mean two months, or eight, or even a year. It is not tied to a fixed period of time, but to the duration for which these resources are set. How quickly can the company set up a new factory or warehouse? How long will it take before I can get a loan to buy and install a new machine? At what pace can we train employees to expand their skills? The answer to these questions determines the duration of the short-term.
With SRAS, the number of goods or services provided increases as the price increases. Therefore, we generally consider SRAS to be elastic. Mainly because companies can change their variable factors of production in the short term to increase production.
The short term curve
In the short run, the aggregate supply curve responds to the price level. This means it tilts up rather than fully vertical. The SRAS curve is also drawn to reflect some variables such as: B. the nominal wage. This nominal wage rate is fixed in the short term, so a price increase implies greater profit potential to justify an increase in output. The situation is different in the long run, where the nominal wage rate depends on economic conditions (low unemployment leads to higher nominal wages and vice versa).
The assumption underlying the SRAS curve is that suppliers of resources needed for production do not respond immediately to an increase in the price level. For example, take the previous example of the distillery. If the price level of whiskey and gin has increased in general, the distillery can immediately start production again. However, malt and barley producers and bottle packers are not allowed to raise their own prices immediately. It will take some time.
Short-run aggregate supply curve | Source:coursehero.com
The figure above shows the direct relationship between changes in the price level and the quantity produced in the short term. The higher the price, the more production is provided and vice versa.
Frequently Asked Questions
Why is the short-run aggregate supply curve rising?
The short-term curve is ascending as it is directly related to changes in the short-term price level. The higher the price, the higher the production. This relationship is then drawn in ascending order.
Why is the long-run aggregate supply curve vertical?
The long-run curve is vertical because price changes do not affect total production over the long term. Rather, it is other production factors that influence the overall output. These include labour, resources and capital.
What relationship does the aggregate supply curve describe?
The aggregate supply curve describes the relationship between real GDP and changes in the price level. We can break it down into two main curves in the short and long term. Their names are short-run aggregate supply curves (SRAS) and long-run aggregate supply curves (LRAS).
How does an increase in the price level affect the short-run aggregate supply curve?
An increase in the short-term total supply (SRAS) price level means a consequent increase in total production as firms try to take advantage of higher prices. This stems from the notion that the short-term curve is sloping upwards. The higher the price, the higher the output due to a company's pursuit of profit.
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