Aggregate Supply
IntermediateAggregate supply is the total amount of goods and services that all businesses in an economy are willing and able to produce at a given overall price level, over a period of time.
Aggregate supply reflects the economy's productive capacity. In the long run, it depends on the quantity and quality of the factors of production: the number of workers and their skills, the stock of capital such as machinery and buildings, natural resources and the technology used to combine them.
In the short run, businesses can increase output somewhat by using existing resources more intensively, for example through overtime. But in the long run, sustained increases in output require growth in productive capacity.
Aggregate supply can be affected by shocks. For example, a sharp rise in oil prices increases production costs across the economy, reducing aggregate supply. This tends to push prices up and output down at the same time, a combination that can lead to stagflation.
Policies aimed at increasing aggregate supply over time are often called supply-side policies. They include investing in education and training, improving infrastructure, encouraging innovation and reducing barriers to business activity.
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