Universidad Autnoma de Nuevo Len

Facultad De Contadura Pblica y Administracin

Lic. En Negocios Internacionales

Economics
Aggregate Supply and components

Arturo Alejandro Flores Quiones

ID: 1551427
Group 4Bi
Date 27/03/2015

Introduction
The total supply of goods and services produced within an economy at a given
overall price level in a given time period. It is represented by the aggregatesupply curve, which describes the relationship between price levels and the
quantity of output that firms are willing to provide. Normally, there is a
positive relationship between aggregate supply and the price level. Rising
prices are usually signals for businesses to expand production to meet a higher
level of aggregate demand, also known as "total output".
A shift in aggregate supply can be attributed to a number of variables. These
include changes in the size and quality of labor, technological innovations,
increase in wages, increase in production costs, changes in producer taxes and
subsidies, and changes in inflation. In the short run, aggregate supply responds
to higher demand (and prices) by bringing more inputs into the production
process and increasing utilization of current inputs. In the long run, however,
aggregate supply is not affected by the price level and is driven only by
improvements in productivity and efficiency.
On this paper we will show you how it works, the components that drive the
AS, and the probably shifts of them.

Essay
Aggregate supply is defined as the total of all goods and services produced by
an economy over a certain period of time. This time frame is important,
because supply usually changes more slowly than demand. For example, when
demand for a good rises, it takes a while for companies to ramp up production.
When demand drops, it can takes months for companies to reduce supply,
because it means closing factories and laying off workers. That's why there's a
big difference between supply in the short-run versus the long-run. Short-run
supply depends on price.
As demand rises, customers are willing to pay a higher price. Businesses will
increase supply to gain the profits from higher prices until they reach their
current capacity. In the long-run, if the price and demand stay high, businesses
can supply even more as they add workers, machinery and factories.
The factors of production determine the total amount that can be supplied.
This amount is called the natural rate of output. Supply that's more or less than
this is called short-run economic fluctuations. There are four factors that
determine long-run supply:
Labor -- The people who work for a living. The value of labor depends
on workers' education, skills and motivation. The reward or income for
labor is wages.
Capital Goods -- Man-made objects, such as machinery and
equipment, which are used in production. The income derived from
capital goods is interest.
Natural Resources -- The raw goods and materials used by labor to
create supply. The income for this is rent.
Entrepreneurship -- The drive of business owners to produce and
innovate. The income for this is profits.
Financial capital -- Such as money and credit, is not a factor of
production because it's used to buy the factors of production. In other
words, it isn't itself a component of anything produced. However, the

ease of obtaining financial capital, whether through stocks, bonds or

loans, plays a critical role in supply.

The supply curve charts out how much will be supplied based on the price.
Here's how it works. If someone asks you, "How much will you supply?" you
would first ask them, "How much will you pay me?" and if that answer were
satisfactory you'd want to know, "How long have I got?" In other words, your
answer would vary depending on the price and the time frame. That is
essentially what is described in a supply curve. The higher the price and the
longer the time frame, the more you would produce. That's why a normal
supply curve slopes up to the right. An aggregate supply curve simply adds up
the supply curves for every producer in the country.

MAP
AGGREGATE SUPPLY

TIME

GOODS AND SERVICES

SHORT RUN

FACTORS OF
PRODUCTION

LABOR
CAPITAL GOODS

DEPENDS ON
PRICE

NATURAL
RESOURCES

ENTREPENEURSHIP

WAGES
RENT

INTEREST
PROFITS

LONG RUN

DEPENDS ON
PRODUCTION