Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period.

1. AGGREGRATE
SUPPLY
PRESENTED BY:
MR. IMPERIAL

2. AGGREGATE
SUPPLY
Aggregate supply is the
total amount of goods
(including services)
supplied by businesses
within a country at a given
price level. The higher the
price level, the greater the
incentive of businesses to
produce more of their
goods for the market.
Aggregate supply, also
known as total output, is
the total supply of goods
and services produced
within an economy at a
given overall price in each
period.

3. The quantity of real GDP supplied is the total
amount of final goods and services that firms in the
country plan to produce, and it depends on the
quantities of
 Labor employed
 Capital, human capital, and state of technology
 Land and natural resources
 Entrepreneurial talent
You saw in the previous unit that at full
employment, real GDP equals to potential GDP . The
quantities of land, capital, and human capital, the
state of technology, and the amount of
entrepreneurial talent are fixed. Labor market
equilibrium determines the quantity of labor
employed, which is equal to the quantity of labor
demanded and the quantity of labor supplied at the
equilibrium wage rage.
Over the business cycle, real GDP fluctuates around
potential GDP because the quantity of labor
employed fluctuates around its full employment
level. The aggregate supply-aggregate demand
model explains these fluctuations.

4. Aggregate Supply is the relationship between the
quantity of real GDP supplied and the price level when
all other influences on production plans remain the
same. This relationship can be described as follows:
Other things remaining the same, the higher the
price level, the greater is the quantity of real GDP
supplied, and the lower the price level the smaller is the
quantity of real GDP supplied.
Figure 6.1 illustrates aggregate supply as an
aggregate supply schedule and aggregate supply curve.
The aggregate supply schedule lists the quantities of
real GDP supplied at each price level, and the upward-
sloping AS curve graphs these points.
The figure also shows potential GDP: P16 trillion in
the figure. When the price level is 105, the quantity of
real GDP supplied is P16 trillion, which equals potential
GDP (at point C on the AS curve)
Along the aggregate supply curve, the price level is
the only influence on production plans that changes. A
rise in the price level brings an increase in the quantity
of real GDP supplied and a movement along the
aggregate supply curve; a fall in the price level brings a
decrease in the quantity of real GDP supplied and a
movement down along the aggregate supply curve.

6. Among the other influences on
production plan that remind
constant along the AS curve
are
 The money wage rate
 The money prices of other
resources.
In contrast, along the potential
GDP line, when the price level
changes, the money wage rate
and the money prices of other
resources change by the same
percentage as the change in
the price level to keep real
wage rate (and other real
prices) at full-employment
equilibrium level.

7. SHIFTERS
1. Resource Prices- a change in the cost or
availability of key resources will affect the
amount that producers can make in the short-
run.
2. Actions by the Government- a change in
taxes, subsidies, or regulations can change the
incentives of producers and affect the amount
they produce.
3. Productivity- a change in technology or
human capital can change the amount
producers can make with the same number of
resources.
4. Inflation- If aggregate supply falls but
aggregate demand remains unchanged, there

8. THE PRINCIPLE OF SHORT AND LONG RUN
AGGREGATE SUPPLY
 Short run aggregate supply
A curve is an upward sloping curve that depicts
the number of goods and services produced at
each price level in the economy. Increasing the
price level causes a movement along the short run
aggregate supply curve, leading to higher output
and higher employment.
 Long-run aggregate supply (LRAS)
A curve that shows the relationship between
price level and real GDP that would be supplied if
all prices, including nominal wages, were fully
flexible; price can change along the LRAS, but
output cannot because that output reflects the full
employment output.

10. WILL THE FOLLOWING INCREASE OR
DECREASE SHORT-RUN AGGREGATE
SUPPLY? IDENTIFY THE SHIFTER.
1. An increase in nominal wages for many
workers.
2. A significant increase in the amount of
physical capital.
3. Random and persistent power outages for
several months.
4. A decrease in corporate taxes on
producers
5. Consumers and businesses expect higher
inflation.

11. WILL THE FOLLOWING INCREASE OR DECREASE SHORT-RUN
AGGREGATE SUPPLY? IDENTIFY THE SHIFTER.
1. An increase in nominal wages for many workers. Costs↑ SRAS↓
2. A significant increase in the amount of physical capital. ↑ Resources SRAS↑
3. Random and persistent power outages for several months. Resources SRAS↓
4. A decrease in corporate taxes on producers. Business Taxes↓ SRAS↑
5. Consumers and businesses expect higher inflation. Costs↑ SRAS↓

12. WILL THE FOLLOWING
INCREASE OR DECREASE
LONG-RUN AGGREGATE
SUPPLY? IDENTIFY THE
SHIFTER.
1. An increase in
nominal wages for
many workers.
2. A significant increase
in the amount of
physical capital.

13. WILL THE FOLLOWING INCREASE OR
DECREASE LONG-RUN AGGREGATE
SUPPLY? IDENTIFY THE SHIFTER.
1. An increase in nominal wages for many
workers. LRAS will stay the same
2. A significant increase in the amount of
physical capital. Capital Stock↑ LRAS↑

14.  Capital Stock- the accumulation of physical
capital, like factories, tools, and equipment,
used to produced goods and services. In
economics, "capital" is never money.
 Negative Supply Shock- an unexpected
decrease in the availability of a key
resource. This causes a decrease in the
short-run aggregate supply.
 Positive Supply Shock- an unexpected
increase in the availability of a key
resource. This causes an increase in the
short-run aggregate supply.
REMEMBER:

15. WHY THE AS CURVE
SLOPES UPWARD?
Why does the quantity of
real GDP supplied increases
when the price level rises and
decrease when the price level
falls? The answer is that a
movement along the AS curve
brings a change in the real
wage rate (and changes in the
real cost of other resources
whose money price are fixed).
If the price level rises, the real
wage rate changes, firms
change the quantity of labor
employed and the level of
production.

16. CONCRETE EXAMPLE
A firm sells ketchup for P45 a bottle. The real wage rate
of ketchup bottling workers is 10 bottle of ketchup. That is,
the firm must sell 10 bottles of ketchup to buy one day of
labor. Now suppose the price of ketchup fall to P37 a bottle.
The real wage rate of as bottling worker has increased to 12
bottles - the firm must now sell 12 bottles of ketchup to buy
one day of labor. If the price of a bottle of ketchup increased,
the real wage rate of a bottling worker would fall. For
example, if the price increased to P50 a bottle. The real wage
rate would be 9 bottles per worker - the firm needs to sell 9
bottles of ketchup to buy one day of labor.
Firms respond to a change in the real wage rate by
changing the quantity of labor employed and the quantity
produced. For the economy, employment and real GDP
change. There are three ways in which these changes occur:
⚫ Firms change their output rate.
⚫ Firms shut down temporarily or restart production.
⚫ Firms go out of business or start up in business.

17. CHANGE IN OUTPUT RATE
To change its output rate, a firm must change the quantity of
labor that it employes. It is profitable to hire more labor if the
additional labor costs less than the revenue it generates. If the
price level rises and the money wage rate doesn't change, an
extra hour of labor that was previously unprofitable becomes
profitable. So, when the price level rises and the money wage
rate doesn't change, the quantity of labor demanded and
production increase. If the price level falls and the money wage
rage doesn't change, a day of labor that was previously
profitable becomes unprofitable. So, when the price level falls
and the money wage rate doesn't change the, quantity of labor
and production decrease.

18. TEMPORARY SHUTDOWNS AND
RESTARTS
A firm that is incurring a loss might
foresee a profit in the future. Such a firm
might decide to shut down temporarily and
lay off its workers. The price level relative to
the money wage rate influences temporary
shut down decisions. If the price level rise
relative to wages, fewer firms decide to shut
down temporarily; so, more firms operate,
and the quantity of real GDP supplied
increases. If the price level falls relative to
wages, a larger number of firms find that they
cannot earn enough revenue to pay the wage
bill and so temporarily shut down. The
quantity of real GDP supplied decreases.

19. BUSINESS FAILURE AND STARTUP
People create businesses in the hope of earning
a profit. When profits are squeezed or when losses
arise, firmer fall, fewer newer firms start up, and the
number of firms decreases. When profits are
generally high, fewer firms fail, more firms start up,
and the number of firms increases.
The price level relative to the money wage rate
influence the number of firms in business. If the
price level rises relative to wages, profits increase,
the number of firms in business increases, and the
quantity of real GDP supplied increases. If the price
level falls relative to wages, profits fall, the number
of firms in business decreases, and the quantity of
real GDP supplied decreases.
In a severe recession, business failure can be
contagious. The failure of one firm puts pressure on
both its suppliers and its customers and can bring a
flood of failures and a large decrease in the
quantity of real GDP supplied.

20. 1.2 Changes in
Aggregate Supply
Aggregate supply changes when any
influence on production plans other
than the price level changes. Aggregate
supply changes when
• Potential GDP changes
• The money wage rate changes
• The money price of other resources
change

21. CHANGES IN POTENTIAL GDP
Anything that changes potential GDP
changes aggregate supply and shifts the
aggregate supply curve. Figure 6.1
illustrates such a shift. You can think of
point C as an anchor point. The AS curve
and potential GDP line are anchored at
this, and when potential GDP changes,
aggregate supply changes along with it.
When potential GDP increases from P16
trillion to P17 trillion, point C shifts to
point C, and the AS curve and potential
GDP line shift rightward together. The AS
curve shifts from AS, to AS

22. CHANGE IN
MONEY WAGE
RATE
A change in the
money wage rate
changes aggregate
supply because it
changes firms' costs. The
higher the money wage
rate, the higher are the
firms' costs and the
smaller is the quantity
that firms are willing to
supply at each price
level. Soon as increase in
the money wage rate
decreases aggregate
supply.

24. Suppose that the money wage rate is P525 per day and the
price level is 105. Then the real wage rate is P500 per day (P525 x
100 ÷ 105 = P500) - Unit 2. If the full employment equilibrium
real wage rate is P500 per day, the economy is at full employment
and real GDP equals potential GDP in Figure 6.2, the economy is
at point C on the aggregate supply curve AS The money wage
rate is P525 per day at all point on AS-
Now suppose the money wage rises to P575 per day but the
full-employment equilibrium real wage rate remains at P500 per
day. Real GDP now equals potential GDP when the price level is
115, at point Don the aggregate supply curve AS2 (If the money
wage rate is P575 per day and the price level is 115, the real wage
rate is P575 x 100 ÷ 115 = P500 per day.) The money wage rate is
P575 per day at all points on AS2. The rise in the money wage
rate decreases aggregate supply and shifts the aggregate supply
curve leftward from AS, to AS2
A change in the money wage rate does not change potential
GDP. The reason is that potential GDP depends only on the
economy's real ability to produce and on the full-employment
quantity of labor, which occurs at the equilibrium real wage rate.
The equilibrium real wage rate can occur at any money wage rate.

25. CHANGE IN
MONEY PRICES
OF OTHER
RESOURCES
A change in money prices of other resources has a
similar effect on firms' production plans to a change in
the money wage rate. It changes firms' costs. At each
price level, firms 'real costs change and the quantity
that firms are willing to supply changes so aggregate
supply changes.
Figure 6.2 A Change in the Money Wage
Rate

26. PRACTICE
PROBLEM 6.1
1. Explain the influence of each of
the events in List 1 on the quantity
of real GDP supplied and aggregate
supply in India and use a graph to
illustrate.
List 1
 Fuel prices rise
 U.S. firms move their IT and data
functions to India
 Walmart and Starbucks open in
India
 Universities in India increase the
number of engineering
graduates
 The money wage rate in India
rises.

27. 2. In the News: South
Korea imports 97 percent
of its energy usage and is
the world's ninth biggest
user of oil. From June
2014 to February 2015,
the price of crude oil
almost halve.
Explain how the fall in the
price of oil will influence
South Korea's

28. KEY POINTS
Aggregate supply is the
relationship between the
quantity of real GDP supplied
supplied and the price level
when all other influences on
production plans remain the
same.
01
The AS curve slopes upward
because with a given money
wage rate, a rise in the price
level lowers the real wage
rate, increases the quantity
of labor demanded, and
increases the quantity of real
GDP supplied.
02
A change in potential GDP, a
change in the money wage
rate, or a change in the
money price of other
resources changes aggregate
supply.
03