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Aggregate Supply

Terms and Formulae

Table of Contents

Summary

Terms
Adverse Supply Shocks  -  Economic changes that suddenly and drastically increase the cost of inputs and thus shift the aggregate supply curve to the left.
Aggregate Demand  -  The total demand for goods and services in an economy.
Aggregate Supply  -  The total supply of goods and services in an economy.
AS-AD Model  -  The model of aggregate supply and aggregate demand that is used to evaluate the effects of economic policy decisions.
Capital  -  Physical machines and human experience that lead to productivity.
Capital Stock  -  The total amount of capital, both physical and human, that exists in an economy.
Contractionary Policy  -  Monetary and fiscal policy that shifts the aggregate demand curve to the left.
Expansionary Policy  -  Monetary and fiscal policy that shifts the aggregate demand curve to the right.
Expected Price Level  -  The level of prices that firms believe will exist at the time that contracts are made.
Factors of Production  -  Refers to capital and labor, as these are the inputs that lead to productivity.
Investment  -  Money spent on the improvement of the capital stock.
Labor  -  Physical effort supplied by workers producing output.
Labor Force  -  The total number of people working at the production of output.
Labor Market  -  The market for workers where the demand for labor and the supply for labor are equilibrated by the wage.
Menu Costs  -  The financial costs to firms of having to reprint menus, catalogues, and other price-listing materials in response to economic changes.
Natural Rate of Output  -  The rate of output when the factors of production, capital and labor, are used at their normal rates.
Nominal Wage  -  The amount of money paid to a worker in terms of actual currency, not purchasing power.
Output  -  Goods and services produced by workers and firms.
Positive Supply Shocks  -  Economic changes that suddenly and drastically decrease the cost of inputs and thus shift the aggregate supply curve to the right.
Price Level  -  The overall cost of goods and services in an economy.
Real Wage  -  The amount of money paid to a worker in terms of purchasing power, not actual currency.
Stagflation  -  A condition where the price level increases and output decreases. This usually results from an adverse supply shock.
Supply Shock  -  An economic change that suddenly and drastically affects the cost of inputs and thus shifts the aggregate supply curve. C.f. adverse supply shocks and positive supply shocks.
Formulae
 
Aggregate supply = Y = Ynatural + a(P - Pexpected) In this formula Y is output, Ynatural is the natural rate of output that exists when all productive factors are used at their normal rates, a is a constant greater than zero, P is the price level, and Pexpected is the expected price level.
 
Aggregate demand = Y = C(Y - T) + I(r) + G + NX(e) In this formula, Y is output, C(Y - T) is consumption as a function of disposable income, I(r) is investment as a function of the real interest rate, G is government spending, and NX(e) is net exports as a function of the real exchange rate.

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