Definition
The aggregate supply curve shows the relationship between the total quantity of goods and services that firms are willing to produce and the overall price level in the economy.
Why It Matters
The aggregate supply curve is central to macroeconomic analysis because it helps explain inflation, economic growth, and business cycles. Economists often distinguish between short-run aggregate supply, which can slope upward due to sticky wages and production costs, and long-run aggregate supply, which reflects the economy’s productive capacity and is determined by labor, capital, technology, and institutions.
Example
If the overall price level rises while wages and some input costs adjust slowly, firms may increase production because selling prices rise faster than costs. This leads to a higher quantity of output supplied in the short run, represented as movement along the short-run aggregate supply curve.