aggregate supply

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. It can be classified into short-run and long-run.

In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process. In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency. Instead, the company ramps up supply by getting more out of its existing factors of production, such as assigning workers more hours or increasing the use of existing technology. Therefore, the short-run aggregate supply curve is upward sloping.

In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency. Such improvements include increases in the level of skill and education among workers, technological advancements, and increases in capital. Therefore, the long-run aggregate supply curve is vertical.