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Aggregate Supply of Products (B)


Aggregate Supply


What is aggregate supply? What are the factors that makes a shift of aggregate supply curve?


Posted: Oct 2009

Aggregate SupplyAggregate Supply a Product (service) is the quantity of products (services) that sellers are willing and able to sell. Offered quantity is positively correlated with good price. The law of Supply says: with the rise of prices of a good,  the supply is growing as well, and vice versa, assuming that other factors constant.

In order to determine how the market works, it is necessary to determine the market supply. The market supply is the sum of all individual bids for certain goods or service. Market supply curve represents the horizontal sum up all the individual bids. 

The Supply curve is not static. It can change, depending of various factors. The shift of supply can happen during the change of input prices, change of technology and number of suppliers.

Shift of Aggregate Supply

For example, the new category of product is making suppliers to produce a large quantities of the new product. Since the product is new the interest is high, the price is high as well. Therefore the supply curve moves to T1.

Later on, the the input prices goes down and technology is getting more efficient, therefore the supply curve returns to the initial. Finally, as more competitors are trying to grab the part of the market, the prices are further dropping down, shifting the curve of supply to T2.  

Recommended reading:

Aggregate Demand of Market  
Market Balance: Demand and Supply Equilibrium  
Case Study: Shift of Supply and Demand  




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