Aggregate Supply:

Aggregate supply of an economy is the amount of output produced by firms in thk economy. With  the objective of profit maximization firms decide on  the quantity of output  they  supply  to  the market. The  total output produced depends  upon two factors:

i)  level of  inputs, and ii)  level of  teclmology.  The demand for inputs by firms depends upon input prices. We  assume  that there are  two primary factors, viz., labour  (L)  and capital (K)  used in the production process. Of  these two  inputs, labour is supplied by households while capital  is  the stock ofequipment and structure  used in production and available  in the market. Machineries, building and vehicles  are  examples  of  capital input. Through 'investment' we can  increase  the  level of capital  input in the economy. On  the other  hand, labour supply depends  on population growtll. We will learn more about the production function, which shows a technical relationship between  inputs and output.

As  the quantity  of  input used increases there  is  an increase  in output, and therefore the quantity supplied  (Q^s). Aggregate supply curve  (AS) is  plotted on a graph where x-axis denotes quantity  of  labour supplied and y-axis denotes  price of  output (P).Recall from microeconomics that  individual supply  curve  is upward sloping  in prices. In the case of  aggregate supply curve. however,  there  is disagreement among economists -whether  it is  a vertical stmight  line or an  increasing  curve  in prices. Usually it  is  assumad that  in  the short run  aggregate  supply  is  upward sloping while  in the  long  run  it is vertical.