Aggregate Supply
The total quantity of goods and services that producers in an economy are willing to supply at a given price level.
What is Aggregate Supply?
Aggregate supply is the total output of goods and services that producers in an economy are willing and able to supply at a given price level. In the short run, it is upward-sloping — higher prices incentivize more production. In the long run, it is determined by productive capacity: labor, capital, and technology. Supply shocks that reduce aggregate supply cause inflation alongside lower output, a condition known as stagflation.
Example
The 1970s oil shocks dramatically reduced aggregate supply in oil-importing economies. Higher energy costs raised production costs across industries, leading to simultaneous high inflation and rising unemployment — stagflation that challenged Keynesian demand-management policies.