Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Determining How Much Stuff an Economy Can Produce


In This Chapter


Introducing aggregate supply


Understanding how aggregate supply affects long-run output


Comparing aggregate supply in the short and long run
When people are demanding something, someone else needs to fulfil that demand to avoid disappointment all round: whether it’s a crying baby after milk, football fans baying for a goal or TV viewers lobbying for the return of their favourite, cancelled show (apparently plenty of people still miss Cagney and Lacey!).


Chapter 7 introduces the idea of aggregate demand (the total demand for goods and services in an economy). But clearly, people demanding a certain amount of output isn’t enough; someone needs to supply that output. In a market economy, this important job falls to firms (the total amount of produced goods and services is called aggregate supply). But these companies face constraints on how much they can produce.

In this chapter you discover what determines how much firms can produce, in the short run and the long run. We discuss important related topics, including economic growth and the flexibility (or otherwise) of prices.

Producing What People Demand:


Aggregate Supply

In order to fulfil the demand from people, firms and governments, companies have to produce and supply goods and services.

Aggregate supply (AS) is the total amount of goods and services that firms produce in an economy. It’s the other half of the Aggregate Demand–Aggregate Supply (AD–AS) model, which is the central model of macroeconomics (we cover AD in Chapter 7). Aggregate supply (together with aggregate demand) determines how much a country can produce (its GDP or output) and how much on average those goods will cost to purchase (the price level) as well as how much unemployment an economy experiences.

Because AS impacts the price level, it also impacts the rate of inflation in an economy. As you will see, AS also determines a nation’s output and living standards in the long run (while AD only impacts output in the short run). If policy makers want to increase living standards sustainably, then their focus must be on aggregate supply.