Aggregate Supply Curve Flashcards, test questions and answers

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What is Aggregate Supply Curve?

An aggregate supply curve is a graphical representation of the relationship between the quantity of goods and services produced in an economy and the resulting price level. The shape of this curve, which is derived from microeconomic theory, reflects how firms react to changes in demand. A basic aggregate supply curve shows that when demand increases, prices increase as well, but at a slower rate than increased production. In other words, there is an inverse relationship between output levels and prices. The aggregate supply curve can be broken down into three distinct sections; these are known as the Keynesian range, intermediate range and long-run range. During normal economic conditions (Keynesian Range), firms respond to increased demands by increasing their output levels without significantly increasing prices due to competition among them for market share. As demand continues to rise beyond what can be met with existing resources (Intermediate Range), businesses start responding by raising prices faster than production levels so they can maximize profits while still meeting customer needs.