<< Chapter < Page Chapter >> Page >
By the end of this section, you will be able to:
  • Explain the aggregate supply curve and how it relates to real GDP and potential GDP
  • Explain the aggregate demand curve and how it is influenced by price levels
  • Interpret the aggregate demand/aggregate supply model
  • Identify the point of equilibrium in the aggregate demand/aggregate supply model
  • Define short run aggregate supply and long run aggregate supply

To build a useful macroeconomic model, we need a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level. This model is called the aggregate demand/aggregate supply model    . This module will explain aggregate supply, aggregate demand, and the equilibrium between them. The following modules will discuss the causes of shifts in aggregate supply and aggregate demand.

The aggregate supply curve and potential gdp

Firms make decisions about what quantity to supply based on the profits they expect to earn. Profits, in turn, are also determined by the price of the outputs the firm sells and by the price of the inputs, like labor or raw materials, the firm needs to buy. Aggregate supply (AS) refers to the total quantity of output (i.e. real GDP) firms will produce and sell. The aggregate supply (AS) curve    shows the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level.

[link] shows an aggregate supply curve. In the following paragraphs, we will walk through the elements of the diagram one at a time: the horizontal and vertical axes, the aggregate supply curve itself, and the meaning of the potential GDP vertical line.

The aggregate supply curve

The graph shows an upward sloping aggregate supply curve. The slope is gradual between 6,500 and 9,000 before become steeper, especially between 9,500 and 9,900.
Aggregate supply (AS) slopes up, because as the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to produce more and to earn higher profits. The potential GDP line shows the maximum that the economy can produce with full employment of workers and physical capital.

The horizontal axis of the diagram shows real GDP—that is, the level of GDP adjusted for inflation. The vertical axis shows the price level. Remember that the price level is different from the inflation rate. Visualize the price level as an index number, like the GDP deflator, while the inflation rate is the percentage change between price levels over time.

As the price level (the average price of all goods and services produced in the economy) rises, the aggregate quantity of goods and services supplied rises as well. Why? The price level shown on the vertical axis represents prices for final goods or outputs bought in the economy—like the GDP deflator—not the price level for intermediate goods and services that are inputs to production. Thus, the AS curve describes how suppliers will react to a higher price level for final outputs of goods and services, while holding the prices of inputs like labor and energy constant. If firms across the economy face a situation where the price level of what they produce and sell is rising, but their costs of production are not rising, then the lure of higher profits will induce them to expand production.

Questions & Answers

A golfer on a fairway is 70 m away from the green, which sits below the level of the fairway by 20 m. If the golfer hits the ball at an angle of 40° with an initial speed of 20 m/s, how close to the green does she come?
Aislinn Reply
cm
tijani
what is titration
John Reply
what is physics
Siyaka Reply
A mouse of mass 200 g falls 100 m down a vertical mine shaft and lands at the bottom with a speed of 8.0 m/s. During its fall, how much work is done on the mouse by air resistance
Jude Reply
Can you compute that for me. Ty
Jude
what is the dimension formula of energy?
David Reply
what is viscosity?
David
what is inorganic
emma Reply
what is chemistry
Youesf Reply
what is inorganic
emma
Chemistry is a branch of science that deals with the study of matter,it composition,it structure and the changes it undergoes
Adjei
please, I'm a physics student and I need help in physics
Adjanou
chemistry could also be understood like the sexual attraction/repulsion of the male and female elements. the reaction varies depending on the energy differences of each given gender. + masculine -female.
Pedro
A ball is thrown straight up.it passes a 2.0m high window 7.50 m off the ground on it path up and takes 1.30 s to go past the window.what was the ball initial velocity
Krampah Reply
2. A sled plus passenger with total mass 50 kg is pulled 20 m across the snow (0.20) at constant velocity by a force directed 25° above the horizontal. Calculate (a) the work of the applied force, (b) the work of friction, and (c) the total work.
Sahid Reply
you have been hired as an espert witness in a court case involving an automobile accident. the accident involved car A of mass 1500kg which crashed into stationary car B of mass 1100kg. the driver of car A applied his brakes 15 m before he skidded and crashed into car B. after the collision, car A s
Samuel Reply
can someone explain to me, an ignorant high school student, why the trend of the graph doesn't follow the fact that the higher frequency a sound wave is, the more power it is, hence, making me think the phons output would follow this general trend?
Joseph Reply
Nevermind i just realied that the graph is the phons output for a person with normal hearing and not just the phons output of the sound waves power, I should read the entire thing next time
Joseph
Follow up question, does anyone know where I can find a graph that accuretly depicts the actual relative "power" output of sound over its frequency instead of just humans hearing
Joseph
"Generation of electrical energy from sound energy | IEEE Conference Publication | IEEE Xplore" ***ieeexplore.ieee.org/document/7150687?reload=true
Ryan
what's motion
Maurice Reply
what are the types of wave
Maurice
answer
Magreth
progressive wave
Magreth
hello friend how are you
Muhammad Reply
fine, how about you?
Mohammed
hi
Mujahid
A string is 3.00 m long with a mass of 5.00 g. The string is held taut with a tension of 500.00 N applied to the string. A pulse is sent down the string. How long does it take the pulse to travel the 3.00 m of the string?
yasuo Reply
Who can show me the full solution in this problem?
Reofrir Reply
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, University of houston downtown: macroeconomics. OpenStax CNX. May 28, 2014 Download for free at http://legacy.cnx.org/content/col11653/1.3
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'University of houston downtown: macroeconomics' conversation and receive update notifications?

Ask