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April 18, 2014 

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MARKET-BASED ECONOMY: A mixed economy that relies heavily on markets to answer the three basic questions of allocation, but with a modest amount of government involvement. While it is commonly termed capitalism, market-oriented economy is much more descriptive of how the economy is structure.

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KEYNESIAN AGGREGATE SUPPLY CURVE:

An aggregate supply curve--a graphical representation of the relation between real production and the price level--that reflects the basic principles of Keynesian economics. The Keynesian aggregate supply curve actually comes in two versions. The basic version is reverse-L shaped, with a horizontal segment connected to a vertical segment at a sharp corner. The modified version is also reverse-L shaped, but the vertical and horizontal segments have positive slopes and connecting corner is rounded. An alternative is the classical aggregate supply curve.
An aggregate supply curve is a graphical representation of the relation between real production and the price level. Keynesian economics implies that the aggregate supply curve contains two segments. One segment is more or less horizontal, indicating that price rigidity in the downward direction results in a reduction in real production. The other segment is more of less vertical, indicating that full employment is more or less maintained at higher price levels.

Keynesian AS Curve
Keynesian AS Curve

The exhibit to the right illustrates a basic Keynesian aggregate supply (AS) curve. The obvious characteristic is that the curve is shaped like a reserve L, with a horizontal segment joining a vertical segment at a sharp corner. The horizontal segment of the curve reflects the Keynesian notion that a decline in demand leads to a decline in real production, primarily because prices remain constant. The vertical segment is a recognition that the total quantities of resources are fixed and that total production is ultimately limited, which results in full employment.

While this reverse-L shaped curve captures the original essence of Keynesian economics, the Keynesian view has changed over the years. A more refined version of the Keynesian aggregate supply curve can be illustrated by clicking the [New Keynesian AS Curve] button.

This new curve retains the same basic reverse-L shape, but the horizontal segment has a slight, positive slope rather than being perfectly horizontal and the vertical segment has a steep, positive slope rather than being perfectly vertical. Moreover, the vertical and horizontal segments are joined by a curved segment rather than a sharp corner.

This version of the Keynesian aggregate supply curve is both more realistic and looks a great deal like the short-run aggregate supply curve used in modern aggregate market analysis.

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Recommended Citation:

KEYNESIAN AGGREGATE SUPPLY CURVE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: April 18, 2014].


Check Out These Related Terms...

     | Keynesian economics | classical economics | classical aggregate supply curve | inflexible prices | effective demand | Keynesian model |


Or For A Little Background...

     | macroeconomics | full employment | short-run aggregate supply curve | aggregate supply | aggregate market analysis | natural unemployment | frictional unemployment | structural unemployment | price level | real gross domestic product |


And For Further Study...

     | aggregate market shocks | business cycles | aggregate demand increase, short-run aggregate market | aggregate demand decrease, short-run aggregate market | disequilibrium, short-run aggregate market | Keynesian equilibrium | injections-leakages model | fiscal policy | Keynesian disequilibrium | multiplier | paradox of thrift |


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