Supply decisions are taken by the producers. Aggregate supply refers to the total output of goods and services that firms wish to produce with a hope that they would be able to sell all the produced quantity at the given price level. The concept of supply in microeconomics has a different meaning. There it shows the quantities of a particular commodity which a firm is willing to offer for sale at varying prices. In macroeconomics aggregate supply is the outcome of the decision of all producers in the economy to hire workers and buy other inputs in order to produce goods (and services) to sell to consumers, governments, and other producers, as well as for export.

The aggregate supply curve is a curve relating the economy’s  producers’ total desired output (Y) tot eh given price level. Aggregate supply curve can be drawn for the short-run and for the long-run. In this cheaper, we shall confine our discussion to the short-run aggregate supply (SRAS) curve only.

The short-run aggregate supply (SRAS) curve shows the quantity of output that firms desire to produce and sell at each price level. on the assumption that price of all inputs remain unchanged.

Generally speaking, the SRAS curve has a positive slope (upward slope) to the right, indicating direct relationship between the price level and GDP. The exact slope of the SRAS curve is determined by two factors : (1) Production costs, and (2) Prices.

(1)    Production Costs and Output. Firms have to employ various factors of production (inputs) to produce goods and services. In the short-run, it is assumed the prices of all the inputs used by the firms remain unchanged. However, the cost per unit of output or unit cost does not remain constant. As the firms decided to raise the level of output they may have to employ less-efficient labour, use low quality raw material, etc. or may have to pay over-time to the workers. As a result. the unit costs of output rise, even if the input prices remain constant. Therefore, as the total output increases unit costs also rise.

(2)    Price and Output. Normally, firms would be willing to produce more at the higher prices. But, how the firms respond to price changes depends upon the market structure in which they operate. Under perfect competition, firms are price takers and quantity adjusters. For a competitive firm the unit costs rise with output. Therefore a competitive firm will produce more only if prices rise and will produce less if prices fall. Under imperfect Competition, firms are price setters. Each firm in this market can influence th3e price because it produces differentiated goods.

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