Aggregate supply is measured by gross domestic product (GDP). The U.S. economy is one of the largest suppliers in the world.
Short-run and Long-run Supply
The typical time frame measured is a year. That time frame is important because supply changes more slowly than demand. For example, demand can rise quickly, but companies can’t ramp up production as fast. They’ve got to hire new workers and build new plants and equipment. When demand drops, it can take companies months to reduce supply. They’ve got to close factories and lay off workers. As demand rises, customers are willing to pay a higher price. Businesses will increase supply to gain profits from higher prices until they reach their current capacity. In the long-run, if the price and demand remain high, companies can boost supply. They have the time to add the workers, machinery, and factories required. The amount supplied is called the natural rate of output. Short-run economic fluctuations can occur without affecting the long-run output rate.
Four Factors of Aggregate Supply
The amount supplied is determined by the four factors of production. U.S. economic success is based on an abundance of these factors of production. The following four factors determine long-run supply. Financial capital is used to buy the factors of production. In other words, financial capital isn’t itself a component of anything produced. The ease of obtaining financial capital, whether through stocks, bonds, or loans, plays a critical role in supply. One of the reasons the U.S. economy is so powerful is the ease of obtaining financial capital.
Aggregate Supply Curve
The supply curve charts out how much will be supplied based on the price. Here’s how it works. If someone asks you, “How much will you supply?” you would first ask them, “How much will you pay me?” If that answer were satisfactory, you’d ask, “How long have I got?” In other words, your answer would vary depending on the price and the time frame. That’s what the supply curve describes. The higher the price and the longer the time frame, the more you would produce. A normal supply curve slopes up to the right. An aggregate supply curve simply adds up the supply curves for every producer in the country.
Aggregate Supply and Aggregate Demand
Of course, you and the person would have to agree on both the price and the deadline. In other words, that person’s demand curve would have to intersect with your supply curve. Aggregate demand is when all the demand for everything in the country is added together. Everything in an economy depends on how these curves intersect.
Law of Supply and Demand
The amount supplied is guided by the laws of supply and demand. The law of supply says that supply increases when the price increases. The law of demand says that demand decreases as the price increases. The right price is when the amount supplied equals the amount demanded. In other words, an economy must follow these five rules:
What the United States Supplies
There are four components of GDP. The first, and most critical, is personal consumption. It’s almost 70% of the total supply. It includes goods, such as automobiles and appliances, and services, such as health care and banking. Business investment is a second component. Most of it is comprised of machinery and equipment. It also includes commercial and residential construction. The third component is government spending. Most of this goes toward Social Security, defense, and Medicare. As a component of GDP, government spending can boost the economy out of a recession. The theory of Keynesian economics describes how this works. Net exports, the fourth component, is exports minus imports. Exports add to GDP, while imports subtract. Most of this is capital goods, such as machinery and equipment, and consumer goods, especially pharmaceuticals.
The Bottom Line
Aggregate supply is the goods and services produced by an economy. It’s driven by the four factors of production: labor, capital goods, natural resources, and entrepreneurship. These factors are enhanced by the availability of financial capital. The aggregate supply or GDP of the United States is one of the largest in the world. The nation’s output consists of consumer goods, business investments, government spending, and exports.
