<< Chapter < Page Chapter >> Page >

The slope of an AS curve changes from nearly flat at its far left to nearly vertical at its far right. At the far left of the aggregate supply curve, the level of output in the economy is far below potential GDP    , which is defined as the quantity that an economy can produce by fully employing its existing levels of labor, physical capital, and technology, in the context of its existing market and legal institutions. At these relatively low levels of output, levels of unemployment are high, and many factories are running only part-time, or have closed their doors. In this situation, a relatively small increase in the prices of the outputs that businesses sell—while making the assumption of no rise in input prices—can encourage a considerable surge in the quantity of aggregate supply because so many workers and factories are ready to swing into production.

As the quantity produced increases, however, certain firms and industries will start running into limits: perhaps nearly all of the expert workers in a certain industry will have jobs or factories in certain geographic areas or industries will be running at full speed. In the intermediate area of the AS curve, a higher price level for outputs continues to encourage a greater quantity of output—but as the increasingly steep upward slope of the aggregate supply curve shows, the increase in quantity in response to a given rise in the price level will not be quite as large. (Read the following Clear It Up feature to learn why the AS curve crosses potential GDP.)

Why does as cross potential gdp?

The aggregate supply curve is typically drawn to cross the potential GDP line. This shape may seem puzzling: How can an economy produce at an output level which is higher than its “potential” or “full employment” GDP? The economic intuition here is that if prices for outputs were high enough, producers would make fanatical efforts to produce: all workers would be on double-overtime, all machines would run 24 hours a day, seven days a week. Such hyper-intense production would go beyond using potential labor and physical capital resources fully, to using them in a way that is not sustainable in the long term. Thus, it is indeed possible for production to sprint above potential GDP, but only in the short run.

At the far right, the aggregate supply curve becomes nearly vertical. At this quantity, higher prices for outputs cannot encourage additional output, because even if firms want to expand output, the inputs of labor and machinery in the economy are fully employed. In this example, the vertical line in the exhibit shows that potential GDP occurs at a total output of 9,500. When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low—at the natural rate of unemployment. For this reason, potential GDP is sometimes also called full-employment GDP    .

The aggregate demand curve

Aggregate demand (AD) refers to the amount of total spending on domestic goods and services in an economy. (Strictly speaking, AD is what economists call total planned expenditure. This distinction will be further explained in the appendix The Expenditure-Output Model . For now, just think of aggregate demand as total spending.) It includes all four components of demand: consumption, investment, government spending, and net exports (exports minus imports). This demand is determined by a number of factors, but one of them is the price level—recall though, that the price level is an index number such as the GDP deflator that measures the average price of the things we buy. The aggregate demand (AD) curve    shows the total spending on domestic goods and services at each price level.

Questions & Answers

what is mutation
Janga Reply
what is a cell
Sifune Reply
how is urine form
Sifune
what is antagonism?
mahase Reply
classification of plants, gymnosperm features.
Linsy Reply
what is the features of gymnosperm
Linsy
how many types of solid did we have
Samuel Reply
what is an ionic bond
Samuel
What is Atoms
Daprince Reply
what is fallopian tube
Merolyn
what is bladder
Merolyn
what's bulbourethral gland
Eduek Reply
urine is formed in the nephron of the renal medulla in the kidney. It starts from filtration, then selective reabsorption and finally secretion
onuoha Reply
State the evolution relation and relevance between endoplasmic reticulum and cytoskeleton as it relates to cell.
Jeremiah
what is heart
Konadu Reply
how is urine formed in human
Konadu
how is urine formed in human
Rahma
what is the diference between a cavity and a canal
Pelagie Reply
what is the causative agent of malaria
Diamond
malaria is caused by an insect called mosquito.
Naomi
Malaria is cause by female anopheles mosquito
Isaac
Malaria is caused by plasmodium Female anopheles mosquitoe is d carrier
Olalekan
a canal is more needed in a root but a cavity is a bad effect
Commander
what are pathogens
Don Reply
In biology, a pathogen (Greek: πάθος pathos "suffering", "passion" and -γενής -genēs "producer of") in the oldest and broadest sense, is anything that can produce disease. A pathogen may also be referred to as an infectious agent, or simply a germ. The term pathogen came into use in the 1880s.[1][2
Zainab
A virus
Commander
Definition of respiration
Muhsin Reply
respiration is the process in which we breath in oxygen and breath out carbon dioxide
Achor
how are lungs work
Commander
where does digestion begins
Achiri Reply
in the mouth
EZEKIEL
what are the functions of follicle stimulating harmones?
Rashima Reply
stimulates the follicle to release the mature ovum into the oviduct
Davonte
what are the functions of Endocrine and pituitary gland
Chinaza
endocrine secrete hormone and regulate body process
Achor
while pituitary gland is an example of endocrine system and it's found in the Brain
Achor
what's biology?
Egbodo Reply
Biology is the study of living organisms, divided into many specialized field that cover their morphology, physiology,anatomy, behaviour,origin and distribution.
Lisah
biology is the study of life.
Alfreda
Biology is the study of how living organisms live and survive in a specific environment
Sifune
Got questions? Join the online conversation and get instant answers!
Jobilize.com Reply

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now




Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask