What Are The Three Ranges Of Aggregate Supply Explained

Aggregate supply refers to the total quantity of goods and services that an economy can produce at different levels of output. It can be categorized into two primary types: short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS).

Short-run aggregate supply (SRAS) represents the immediate capacity of an economy to produce goods and services in response to changes in demand or other short-term factors. This concept reflects the notion that in the short term, firms may not be able to adjust all factors of production, leading to changes in overall output.

On the other hand, long-run aggregate supply (LRAS) describes an economy’s maximum production potential when all factors of production, such as labor and capital, are fully utilized and can be adjusted in response to changes in demand or supply. In the long run, an economy operates at its full capacity, and it can achieve sustained growth without experiencing inflationary pressures.

Understanding these two types of aggregate supply is essential for economists and policymakers to assess an economy’s performance, plan for future growth, and formulate effective economic policies.

The AS curve, representing the Aggregate Supply in an economy, is characterized by three distinct segments that help us understand how the supply of goods and services responds to changes in overall economic output. These three segments consist of:

1. The Flat, Horizontal Portion: At the lowest levels of output, the AS curve exhibits a flat, horizontal segment. During this phase, the economy is operating significantly below its full capacity. Firms can increase production without affecting prices, as there is an abundance of unused resources.

2. The Middle Section with an Upward Slope: In the middle section of the AS curve, we observe a more-or-less gentle upward slope. This indicates that as the economy approaches its potential output, increasing production becomes costlier, and firms may need to pay higher wages or acquire more expensive resources to expand their output.

3. The Steep or Vertical Portion: The third segment of the AS curve is steep or nearly vertical, signifying that the economy is operating near or at its maximum capacity. At this point, further attempts to increase output are met with significant cost increases, and firms may not be able to respond to increased demand by increasing production alone. This can lead to inflationary pressures as prices rise due to limited supply capacity.

To delve deeper into this concept, let’s focus on two specific segments of the AS curve: the flat, horizontal portion, which represents underutilized resources, and the steep, vertical portion, indicating the economy is near its full capacity.

• Changes in resource prices. If the price of oil and other factors of production decrease (those that are not sticky) then firms will seek to produce more. …
• Technology changes. …
• Expectation of future prices.