Aggregate upply Essay Example | Topics and Well Written Essays - 1000 words

Aggregate upply - Essay Example The Aggregate supply is defined as the amount of goods and services rendered by the national economy during particular time period. According to Keynesian economic model, two different versions are related to it,The aggregate supply in the Keynesian cross diagram is represented by Z curve. If the desired total spending line 'bypasses the Z curve of aggregate supply' (Theory of Linear Economics), the intersection represents the level of production, spending and income.In some of the cases, the aggregate supply and aggregate demand curves are represented by Marshallian supply and demand curve. The curve of aggregate supply is shown increasing in upward direction, with slope parallel to the vertical axis. The upward slope of the aggregate supply is time bounded, and such behavior is prominent only for small time interval. The upward slope of the aggregate supply is because 'aggregate production and price level are directly proportional to each other' (Theory of Linear Economics). The di rect relationship between the aggregate production and price level is because of,According to the neo classical economic model, the production can be increased if the prices of certain commodities are increased for wooing the profit oriented organizations. The reason behind increasing the production, and then subsequently increasing the prices is due to the diminished returns, and therefore the rise in marginal cost is forecasted because one or more production related factors remain stable in short run, and is considered to be at highest extreme, this is termed as fixed capital equipment.Taking into consideration the relationship between the income and production, during certain interval the income is fixed, and therefore the rising profit exemplify the expansion of output. However in case of the previous economic models, the income was subjected to vary with the economic conditions, and both the income and economic conditions share direct relationship. This theory is used to expres s the vertical behavior of the aggregate supply curve in long duration. Another model suggests that the economic behavior is dependent upon many non- uniformed and non- related input parameters. Those input parameters include both the labor and fixed capital accessory. However both the parameters can be unemployed, which has subsequent impact on the profit ratio. The positive slope of the AS curve is well explained with the reasons that, some input parameters are fixed priced on short term basis, and the production experiences resistance as it surges. When the demand of the production unit is lowered, the industrial units avoids optimized usage of their capital equipment, therefore keeping the average price level controlled, the production can be increased in case on minimized returns. Therefore 'flat AS curve is obtained' (Alternative Economic models of Transition). However if the demand factor surges, the production units have other unemployed input parameters, therefore the increase in demand and production increases the prices. Therefore AS curve is vertical. The practice of aggregate supply is normally implemented by the government for increasing the efficiency of production and over all national output. The government mainly applies the aggregate supply principle with the reforms in conformity of supply side policies. The government practices aggregate supply in different public institution including research and development, education and training, social welfare reforms, reforms associated with working class, minimizing the authority of trade union. AGGREGATE DEMAND The net demand of goods and services during particular time interval is termed Aggregate Demand. The individual curves sum up to give aggregate demand. The aggregate demand curve is the