Aggregate Supply
Aggregate supply describes how much output producers collectively bring to market at different price levels. The short-run and long-run versions behave differently, and conflating them is the root cause of most confusion about inflation, recessions, and the speed of recovery.
What aggregate supply tracks
Aggregate Supply sits at a specific point in the macro system. This section covers what the concept captures, what it leaves out, and why it matters.
In 1973-74, Arab oil exporters embargoed shipments to the U.S. Oil prices quadrupled. The result was not a standard recession -- it was stagflation: inflation and unemployment rising at the same time. The Phillips curve, which had suggested a stable trade-off between the two, appeared to break down. The aggregate supply framework explains why: a leftward shift of SRAS moves the economy to a point of lower output and higher prices simultaneously.
Understanding aggregate supply means understanding two different time frames. In the short run, sticky wages and prices mean that demand shocks translate partly into output and partly into prices. In the long run, full price flexibility means output is pinned at potential and demand only affects the price level. Most real-world policy debates are about how quickly this adjustment happens.
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