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January 23, 2018 

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BUSINESS CYCLE MEASUREMENT: Three of the most noted and often used measures of business cycle activity are real gross domestic product (especially the growth rate), unemployment rate, and inflation rate. Another group of measures fall under the broad heading of economic indicators and include leading economic indicators, coincident economic indicators, and lagging economic indicators. Real sophisticated economic types also follow measures such as changes in business inventories, Producer Price Index, M2 money supply, durable goods order, and others.

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SHORT-RUN AGGREGATE SUPPLY AND MARKET SUPPLY:

The short-run aggregate supply curve, or SRAS curve, has similarities to, but differences from, the standard market supply curve. Both are positively sloped. Both relate price and quantity. However, the market supply curve is positively sloped due to the law of diminishing marginal returns and the short-run aggregate supply curve is positively-sloped due to inflexible prices, the pool of natural unemployment, and imbalances in real resource prices.
Two Similar Curves
Two Similar Curves

To illustrate the specific short-run aggregate supply and market supply curve similarities and differences consider the graph of a positively sloped curve displayed here. Is this a market supply curve or an short-run aggregate supply curve? A cursory analysis suggests that it could be either.

To reveal the similarities between the both curves, click the [Market Supply] and [Aggregate Supply] buttons. Doing so illustrates that both curves are positively sloped, with each virtually overlaying the other.

Consider the differences between these two curves.

  • First, note that for the market supply curve, the vertical axis measures supply price and the horizontal axis measures quantity supplied. For the short-run aggregate supply curve, however, the vertical axis measures the price level (GDP price deflator) and the horizontal axis measures real production (real GDP).

  • Second, the positive slope of the market curve reflects the law of supply and is attributable to the law of diminishing marginal returns. In contrast, the positive slope of the short-run aggregate supply curve is attributable to: (1) inflexible resource prices that often makes it easier to reduce aggregate real production and resource employment when the price level falls, (2) the pool of natural unemployment, consisting of frictional and structural unemployment, that can be used temporarily to increase aggregate real production when the price level rises, and (3) imbalances in the purchasing power of resource prices that can temporarily entice resource owners to produce more or less aggregate real production than they would at full employment. Similar, but different.
Most notable, the differences between market supply and short-run aggregate supply means that it is not possible to merely add up, or aggregate, the market supply curves for the thousands of goods produced in the economy to derive the short-run aggregate supply curve. The short-run aggregate supply curve dances to its own music and plays be its own set of rules.

<= SHORT-RUN AGGREGATE SUPPLYSHORT-RUN AGGREGATE SUPPLY CURVE =>


Recommended Citation:

SHORT-RUN AGGREGATE SUPPLY AND MARKET SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 23, 2018].


Check Out These Related Terms...

     | change in aggregate supply | change in real production | aggregate supply shifts | slope, short-run aggregate supply curve | inflexible prices |


Or For A Little Background...

     | short-run aggregate supply curve | aggregate supply determinants | short run, macroeconomics | supply | supply curve | price level | law of supply | macroeconomic theories | macroeconomic markets | macroeconomic sectors |


And For Further Study...

     | aggregate demand | aggregate market analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | flexible prices | overemployment | long-run aggregate supply curve |


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