What Is Aggregate Supply?
AS is affected by production costs, including the price of labor (wages), taxes, subsidies, and the price of raw materials. The components of production include labor, or the supply of work done by humans in return for wages or other compensation. The supply of labor varies in response to a variety of economic pressures, including skills, mobility, and wages. A natural resource is a a naturally existing form of physical capital that provides inputs to production, such as land, minerals, water, agricultural products, and forests. Entrepreneurship is the activity by companies and individuals bringing products to market.
Considering these factors shows why AS curves behave differently in the short run and the long run. In the short run, AS is upward sloping because the price level does affect the economy's output.
Because the short-run AS is highly influenced by fluctuations in price levels, it is crucial to understanding in economic fluctuations in the short run.
Why the Short-Run Aggregate Supply Curve Slopes Up
The third theory states that misconceptions exist when producers mistake price changes for relative price changes. A relative price is the price of a good or service relative to the price of other goods and services. The misconceptions theory attributes the upward slope, ultimately, to human errors in decision making. Specifically, producers mistake a change in the prices of their own products for a change in the relative prices of goods in the market. Producers respond to these misconceptions of relative price changes by increasing or decreasing production.
Shifts in the Short-Run Aggregate Supply Curve
For example, if input prices rise, firms will find the profitability of their current production reduced. For any given level of output to be produced, an increase in the price level will be required to achieve the same level of profitability. If price levels do not increase, firms will react by decreasing production. For the economy as a whole, this means that there will be less output at each price level. Graphically, this is represented by a leftward shift in the SRAS curve.
The SRAS curve will also shift because of a change in labor. An increase in the quantity of labor available will shift the AS curve to the right. A decrease in the labor force will shift the AS curve to the left. An increase in physical or human capital will shift the AS curve to the right, while a decline in either will shift the AS curve to the left. An increase in the level of natural resources or their availability will shift the AS curve to the right. For example, if a new source of oil were found, it would increase the amount of natural resources available. This increased supply of oil would result in lower oil prices and a lower cost of production of goods and services that rely on oil as a factor of production.
An improvement in technology results in increased productivity. With increased labor productivity, the unit costs of production fall as long as wages don’t rise sufficiently to offset the increased productivity. With no increase in factor prices, firms are willing to produce more goods and services at the same price levels. The assembly line is an example of an improvement in technology that resulted in workers producing more at the same wage rate.