Econ102 notes part II • Aggreggate Supply is the total supply of goods and services in the economy. That’s the definition and that’s what you should know about the aggregate supply curve. • The long run aggregate supply curve is defined by a point at which there are no capacity constraints on firms. They are not constrained by capital levels and they are not constrained by the amount of labor they have. But in the short run, there are these constraints. • So the way we distinguish short-run vs. long-run aggregate supply is that in the SR, there are capacity constraints. There are also input price adjustments that you should know about. • So the aggregate supply curve is just the positive relationship between the overall price level and aggregate output. • There is a positive relationship for two reasons. The first relates to capacity constraints, which say that when output increases, firms respond to increases in output by increasing their inputs, when they increase their inputs, input prices go up, and when input prices go up, output prices
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