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4.2 Aggregate Supply

(A) Meaning: Aggregate supply is the total quantity supplied by the producers and sellers. In the scheduled form it is presented through a range of expected quantities supplied at arbitrarily chosen prices.

 

Aggregate Supply Schedule

Price

Quantity supplied

1

2

3

4

5

6

5

15

30

48

58

60

(B) Direct Relationship: Aggregate supply shows a direct relationship with the changes in the price level. As price level rises (from 1 through 6) the quantity supplied goes on increasing (from 5 through 60). The direct relationship between price and aggregate supply is due to the same reason as in the case of individual supply curve. In both the cases the cost of production goes on increasing with every addition to the goods produced. Therefore more and more supply can be made only when the price level is rising in order to cover rising cost of production. It can be represented graphically in Figure 12.

In figure 12, quantity supplied has been measured along horizontal axis and price level has been shown on the vertical axis. Because of the direct relation between the two, the supply curve O-AS is continuously rising upwards. However, there is an important difference in the behavior between individual and aggregate supply curves. An individual supply curve is moderately steep throughout. But in case of aggregate supply curve, two distinct phases are noticeable. Initially the AS curve is flatter and rises upwards only gradually. In the figure ON is such an initial phase. But later on the AS curve becomes steeper and finally becomes a vertical straight line. In the figure, N-AS is such steeper phase.

Index

4.1 Aggregate Demand
4.2 Aggregate Supply
4.3 Equilibrium

Chapter 5

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