Meaning and Components of Aggregate Supply Curve

Aggregate Supply, or AS, is the total quantity of goods and services that firms in an economy are willing and able to supply at different overall price levels. It shows the production side of the economy.

The AS curve shows the relationship between the overall price level and the quantity of output firms are willing to produce, holding other factors constant. Low price levels discourage production as businesses struggle to cover costs, while higher prices incentivize firms to increase output.

Economists differentiate between two forms of aggregate supply: the Short-Run Aggregate Supply, SRAS, and the Long-Run Aggregate Supply, LRAS.

The SRAS curve is upward sloping because, in the short run, some wages and prices adjust slowly, so higher prices lead to higher output. The LRAS curve, by contrast, is vertical because, in the long run, when wages and prices fully adjust, output depends on resources and technology, representing the economy's full-employment output, not on price levels.

Together, SRAS and LRAS provide a framework for analyzing short-run fluctuations and long-run growth.