Understanding and calculating aggregate supply in economics

How to calculate total supply?

Understanding and calculating aggregate supply in economics

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Aggregate supply is a key concept in macroeconomics that measures the total amount of goods and services that producers in an economy are willing and able to supply at a given aggregate price level. It is a crucial component in understanding the dynamics of the economy and is often analyzed alongside aggregate demand to assess economic health and performance. In this article, we will look at the main components of the total supply and learn how to calculate it.

Components of gross supply:

Aggregate supply is usually divided into short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS). The short run is characterized by the assumption that output prices (such as wages and raw materials) do not change immediately in response to changes in the general price level. However, in the long run, these input prices are flexible and adaptable to changes in price levels.

Short term aggregate supply (SRAS):

SRAS is influenced by factors such as production costs, resource availability, and technology. The formula for SRAS is often expressed as:

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Where:

An increase in the general price level in the short run ($P$) can bring high profits for enterprises, resulting in an increase in the amount of goods and services delivered.

Long-term general supply (LRAS):

In the long run, the level of production is determined by factors such as the quantity and quality of resources, technological progress, and institutional structures. Long-run aggregate supply is often viewed as the potential output of an economy. It is not affected by changes in the general price level.

$LRAS=f(N,A)$

Where:

• • $N$ amount of work,
  • $A$ represents the availability of technological progress and other information.

Calculation of gross supply:

Aggregate supply (AS) in an economy is a combination of short-run and long-run aggregate supply. The relationship can be expressed as follows:

$AS=\text{min}\{SRAS,LRAS\}$

In other words, the actual level of production in the economy is limited by the low short- and long-run aggregate supply. This reflects the idea that prices and wages are not as flexible in the short run as they are in the long run.

Summary:

Understanding and calculating aggregate supply is essential for policymakers, economists, and investors to assess the health and potential of the economy. By considering both short-term and long-term factors, analysts can learn more about the impact of economic policies and external shocks on the overall production of goods and services.