Tuesday 21 April 2009

Aggregate supply is a total amount that producers are willing and able to supply at a given price level. Increases in AG that are extensions might be caused by different reasons and differently affects output that is amount of goods produced and inflation that is a sustainable rise in the price level. If short run AS increase this is due to reductions in costs while increase in long run AS might be caused by increased productivity. Increase in AS mostly depends on capacity utilization. Capacity utilization means to what extent firms can expand their production. If firms work close to full capacity increases in AS will lead to increases in total output and might help reduce inflationary pressure as you see on the diagram below.


However it depends also in a position of AD and if AD overheating AS, that is when the growth in AD outstripping the growth in AS, this will lead to inflation in the economy.
If there is spare capacity and unemployment, firms can easily expand their production but this will have almost no effect on output and price levels as it is shown on the diagram below.


1 comment:

chris sivewright said...

http://efbusinesseconomics.blogspot.com/2009/04/elvi-daisy-mary-lex-long.html