Similar to Aggregate Demand, the aggregate supply curve is the supply of all goods and services within the industry. In the short run, as the price level goes up, producers will produce more as they will make more profit. Thus, the quantity supplied and Real GDP would decrease, just like a market supply graph.
Shifting the Aggregate Supply Curve
Anything that affects the production of a lot of goods and services:
- Resource Prices: an increase in resource prices will decrease production, and shift the aggregate supply curve left
- Actions by the Government: taxes/subsidies/regulation by the government, but not including government spending (which shifts aggregate demand)
- Productivity: a change in technology or human capital can increase or decrease the aggregate supply
Remember that capital stock refers to physical capital like factories, tools, and equipmentβnot money. Similarly, supply shock is an unexpected increase or decrease in the availability of a key resource. Positive and negative supply shock correspondingly causes an increase/decrease in aggregate supply. Finally, always remember that a change in price level does not shift the supply. However, a change in the expected price level will shift the supply.
Changes in the price level will cause changes in output and employment in the short run, but not the long run.
This concept is further described in 3.4 β Long-Run Aggregate Supply (LRAS)