Aggregate Supply (AS) Curve
The aggregate supply curve depicts the quantity of real GDP that is supplied by the economy at different price levels. The reasoning used to construct the aggregate supply curve differs from the reasoning used to construct the supply curves for individual goods and services. The supply curve for an individual good is drawn under the assumption that input prices remain constant. As the price of good X rises, sellers' per unit costs of providing good X do not change, and so sellers are willing to supply more of good X-hence, the upward slope of the supply curve for good X. The aggregate supply curve, however, is defined in terms of theprice level. Increases in the price level will increase the price that producers can get for their products and thus induce more output. But an increase in the price will also have a second effect; it will eventually lead to increases in input prices as well, which, ceteris paribus, will cause producers to cut back. So, there is some uncertainty as to whether the economy will supply more real GDP as the price level rises. In order to address this issue, it has become customary to distinguish between two types of aggregate supply curves, the short-run aggregate supply curve and the long-run aggregate supply curve.
Short-run aggregate supply curve. The short-run aggregate supply (SAS) curve is considered a valid description of the supply schedule of the economy onlyin the short-run. The short-run is the period that begins immediately after an increase in the price level and that ends when input prices have increased in thesame proportion to the increase in the price level.
Input prices are the prices paid to the providers of input goods and services. These input prices include the wages paid to workers, the interest paid to the providers of capital, the rent paid to landowners, and the prices paid to suppliers of intermediate goods. When the price level of final goods rises, the cost of living increases for...