Aggregate Supply

Aggregate supply (AS) is the total output firms are willing to produce at each price level. The short run and long run behave very differently — and the shape of the long-run curve is one of the biggest debates in macroeconomics.

Learning objectives — by the end of 2.3 you can…

- draw SRAS and explain what shifts it; - analyse cost-push inflation using AD/AS; - draw and compare the Keynesian and Classical LRAS curves; - explain the factors that shift LRAS (the economy's productive potential).

Short-run aggregate supply (SRAS)

Spec: 2.3.1

Aggregate supply is the total output firms plan to produce at each price level. In the short run, some costs (especially wages) are "sticky", so a higher price level makes extra production profitable — SRAS slopes upward. SRAS shifts when costs of production change: raw material and energy prices, the exchange rate (which changes import costs), and business tax rates.

A rise in costs shifts SRAS left, causing cost-push inflation:

Long-run AS: Keynesian vs Classical

Spec: 2.3.2

In the long run, all costs can adjust. Economists disagree about the shape of long-run aggregate supply (LRAS):

What shifts LRAS (the economy's productive potential)

An outward shift of LRAS is long-run economic growth. It is driven by changes in:

- Technology and productivity - Education, skills and the quality of human capital - Government regulation and tax (incentives to work and invest) - Demography and net migration (size of the workforce) - Competition policy (efficiency)

Exam tip

Pick the AS shape that suits your argument and justify it. The Classical view implies demand-side policy only causes inflation in the long run (so use supply-side policy). The Keynesian view implies that, with spare capacity, boosting AD can raise output without inflation — a powerful evaluation point.

#### Demand-pull inflation

The other main cause of inflation works through AD: if aggregate demand rises faster than supply can keep up, the price level is pulled upward.

2.3 Recap — nail these

SRAS slopes up; rising costs shift it left → cost-push inflation / stagflation.
Classical LRAS is vertical (AD only changes prices long-run); Keynesian LRAS is flat with spare capacity then vertical.
An outward LRAS shift = long-run growth, driven by productivity, skills, technology, investment.
Demand-pull (AD →) vs cost-push (SRAS ←) — be ready to draw both.