Costs and productive resources determine what firms can supply.
Aggregate supply describes the real output producers are willing and able to provide at each general price level under stated production conditions. In a short-run upward-sloping AS model, a higher output price level relative to some initially unchanged input costs can make additional production worthwhile, while bottlenecks raise the cost of expanding output. Input prices, productivity, resource availability, technology and institutions can shift AS. A cost shock changes the price level required to supply a given output. Better productive capacity can allow more sustainable output; distinguish this from simply using existing idle resources.
- Supply relationship
- Aggregate supply (AS) is the real output producers are willing and able to supply at each general price level, given production conditions.
- Short-run costs
- Higher input costs, such as fuel prices, make each output level more expensive to supply. AS shifts up/left. Lower costs can shift it down/right, allowing more output at a given price level.
- Productive conditions
- Productivity is output per unit of resource used. Skills, capital equipment, technology and access to inputs can improve it or expand what the economy can produce.
Apply the idea
Movement along AS
When selling prices rise while some input costs initially stay unchanged, producing more can become worthwhile. As output expands, bottlenecks - shortages of particular workers, equipment or inputs - can make further expansion increasingly costly. This explains the upward-sloping short-run relationship used here.
Capacity and unit cost
A productivity improvement can both reduce unit costs and support greater sustainable output, but adoption and complementary inputs matter.
Worked example: Imported fuel becomes more expensive
An economy initially uses imported fuel throughout production and transport. Fuel becomes more expensive, with productivity and all other production conditions unchanged. Later, an effective energy-saving technology lowers fuel required per unit.
- The fuel-price increase raises production costs at each output level, shifting short-run AS up/left.
- This changes the whole supply relationship: firms now need a higher selling price to make a given output worthwhile. It is a shift of AS, not a movement along the old curve caused only by a different general price level.
- The energy-saving improvement can lower unit costs and shift AS down/right relative to the higher-cost position.
- The technology's effect depends on adoption, training and other constraints. It need not fully offset the original cost increase.
Watch out for this
A higher input price is shown only as movement along the same AS curve.
Input prices are a determinant held constant along a given AS curve. Their change shifts it.
Check your understanding
With other conditions unchanged, improved productivity reduces unit production costs. Which shift is supported?
- AS down/right.
- AS up/left.
- AD must fall by exactly the productivity gain.