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AGGREGATE SUPPLY: The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply (AS) is one half of the aggregate market analysis; the other half is aggregate demand. Aggregate supply, relates the economy's price level, measured by the GDP price deflator, and aggregate domestic production, measured by real gross domestic product. The aggregate supply relation is generally separated into long-run aggregate supply, in which all prices and wages and flexible and all markets are in equilibrium, and short-run aggregate supply, in which some prices and wage are NOT flexible and some markets are NOT in equilibrium.

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RESOURCE PRICE, AGGREGATE SUPPLY DETERMINANT:

One of three categories of aggregate supply determinants assumed constant when the aggregate supply curve is constructed, and which shifts the aggregate supply curve when it changes. An increase in a resource price causes a decrease (leftward shift) of the short-run aggregate supply curve. A decrease in a resource price causes an increase (rightward shift) of the short-run aggregate supply curve. The other two categories of aggregate supply determinants are resource quantity and resource quality. Specific determinants falling into this general category include wages and energy prices. Anything affecting the prices paid for the use of labor, capital, land, and entrepreneurship is also included.
This determinant category is based on the relation between resource price, production cost, and the price level. Changes in a resource price affects the cost of production. A higher price means higher cost and a lower price means lower cost. Changes in production cost then affect the prices that sellers are willing to accept to sell goods and services, which subsequently affects the overall price level. Greater production cost means higher product prices and a higher price level, and lower production cost means lower product prices and a lower price level.

The result is that resource price shifts the SRAS curve. In particular, if a resource price is higher, then aggregate supply decreases and the short-run aggregate supply curve shifts leftward. With a lower resource price, aggregate supply increases and the short-run aggregate supply curve shifts rightward.

Two Examples

Two of the more important resource prices that influence production cost and shift the SRAS curve are:
  • Wages: Payments to labor are usually at the top of any list of resource prices. The reason is that they account for about 60 percent of production cost. Economy-wide changes in wages shift the SRAS curve. Higher wages, by increasing production cost, cause a decrease in short-run aggregate supply. Lower wages, by decreasing production cost, cause an increase in short-run aggregate supply.

  • Energy Prices: Energy prices, especially petroleum prices, are a second key resource price. Because energy, like labor, is critical in the production of virtually every good and service in the economy, changes in energy prices also tend to shift the SRAS curve. Like wages, higher energy prices increase production cost and cause a decrease in short-run aggregate supply. Lower energy prices decrease production cost and cause an increase in short-run aggregate supply.

Shifting the SRAS Curve

Shifting the SRAS Curve
Shifting the SRAS Curve

To illustrate how a resource price like wages or energy prices shift the short-run aggregate supply curve, consider the exhibit to the right. This exhibit displays a representative, positively-sloped short-run aggregate supply curve. Like all short-run aggregate supply curves, this one is constructed based on several ceteris paribus aggregate supply determinants, such as wages or energy prices. The key question is: What happens to the short-run aggregate supply curve if a resource price changes? Make note that resource price is not a determinant of long-run aggregate supply. As such there is no need to consider shifts of the LRAS curve.

Lower Resource Price

Suppose, for example, that wages or energy prices fall. This decline in a resource price increases production cost and leads to an increase in short-run aggregate supply, causing the SRAS curve to shift rightward. Note that the decline in a resource price and thus production cost make it possible to supply the same quantity of real production at a lower price level or to supply a larger quantity of real production at the same price level, both of which are an increase in aggregate supply.

To see how a lower resource price affects the aggregate supply curve, click the [Lower Resource Price] button. The lower resource price triggers an increase in short-run aggregate supply and a rightward shift of the short-run aggregate supply curve.

Higher Resource Price

Alternatively, suppose that wages or energy prices rise. This increase in a resource price reduces production cost and leads to a decrease in short-run aggregate supply, causing the SRAS curve to shift leftward. Note again that the increase in the resource price and thus production cost means the same quantity of real production is supplied at a higher price level or a larger quantity of real production is supplied at the same price level, both of which depict a decrease in aggregate supply.

To see how a higher resource price affects the aggregate supply curve, click the [Higher Resource Price] button. The higher resource price triggers a decrease in short-run aggregate supply and a leftward shift of the short-run aggregate supply curve.

The Other Two Determinants

Resource price is one of three categories of aggregate supply determinants. The other two are resource quantity and resource quality. While resource quantity and resource quality affect both the long-run and short-run aggregate supply curves, resource price affects only the short-run aggregate supply curve.
  • Resource Quantity: This determinant includes any ceteris paribus factors that affect the quantity of labor, capital, land, or entrepreneurship used in production, such as population growth or change in the capital stock. An increase in resource quantity increases aggregate supply and shifts both long-run and short-run aggregate supply curves to the right. A decrease shifts both curves to the left.

  • Resource Quality: This determinant includes any ceteris paribus factors that affect the quality of labor, capital, land, or entrepreneurship used in production, including education and technology. An increase in resource quality increases aggregate supply and shifts both long-run and short-run aggregate supply curves to the right. A decrease shifts both curves to the left.

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Recommended Citation:

RESOURCE PRICE, AGGREGATE SUPPLY DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 16, 2018].


Check Out These Related Terms...

     | resource quantity, aggregate supply determinant | resource quality, aggregate supply determinant | wages, aggregate supply determinant | energy prices, aggregate supply determinant | aggregate supply determinants | aggregate supply shifts | change in aggregate supply | change in real production | slope, aggregate supply curve | technology, aggregate supply determinant | capital stock, aggregate supply determinant | aggregate demand determinants |


Or For A Little Background...

     | aggregate supply | short-run aggregate supply | long-run aggregate supply | short-run aggregate supply curve | long-run aggregate supply curve | gross domestic product | price level | real production | GDP price deflator | real gross domestic product | production cost |


And For Further Study...

     | AS-AD analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | flexible prices | inflexible prices | short-run aggregate supply and market supply | aggregate market shocks | self correction, aggregate market |


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