Aggregate supply in a economy refers to the total volume of all goods and services available for consumption and investment.

We known that the money value of all goods and services produced in an economy is known as national product or output.

National product also represents the total of the payments made to the for factors of production, viz, land, labour, capital and organization.

The minimum expected sale proceeds which are necessary to induce firms to produce and output and to provide employment to a certain number of workers are the aggregate supply price of that output.

The income of the factors of production also constitutes the expenses incurred by all the firms taken together on the various goods and services produced at a given level of employment.

The firms will maintain this level of employment only if all of them taken together can earn sufficient income to meet the expenses (or the costs ) being incurred on the factors of production. In other words, there is minimum level of sale proceeds which the firms must get in order to maintain the present level of employment. A schedule of such minimum sale proceeds is known s the aggregate supply function or the aggregate supply schedule.

Thus, the aggregate supply can be defined as the total amount of money receipts which the firms in the economy taken together ‘must receive’ from the sale of their product at varying levels of employment.

Relation between Aggregate Supply and the Level of Employment. The aggregate supply price is positively related to the level of employment. It increases with an increase in the level of implement and vice versa. Thus, the aggregate supply schedule like the aggregate demand schedule, is also an increasing function of the level of employment. It can be symbolically written as :

            AS = f(N)
Where AS = aggregate supply price of the output, and
             N = number of workers employed.

In the volume of employment is shown on X-axis and sale proceeds on the Y-axis; AS is the aggregate supply cure. The curve slopes upwards to the right as level of employment increases.

Thus, employment level of ON costs Rs. OR, while ON₁ costs Rs. OR₁ and ON₁ costs Rs. OR₁ .

The shape of the aggregate supply curve depends upon physical and technological conditions of production, that is the extent to which a given addition to employment increases costs. For our purpose we can accept the sophistical and technical conditions as given. We may mention three important points that explain the positive slope of aggregate supply curve:


(1)    Since marginal costs are bound to be positive, the aggregate supply curve will slope upwards as employment increases

(2)    As level of employment output increases less efficient factors of production are bound to be employed. Consequently, diminishing returns set in and the aggregate supply curve will start to rise more steeply.

(3)    At full employment level, nay increase in costs cannot result in extra employment and so the aggregate supply curve becomes vertical. This has been shown. As soon as the level of employment reaches ON( ) the aggregate supply curve rises vertically.

For more help in Aggregate Supply Function click the button below to submit your homework assignment