Function of aggregate supply
This curve shows the relationship between the
level of production supplied by companies and the level of prices.
The incline of the curve is positive: if
prices increase companies offer more (production will increase).
This positive slope comes about when
we analyse the behaviour of the economy in the short-medium
term, being the posture defended by the economy school called
"The Synethesis Model" (this name comes about because
it connects the Keynesian School which examine the short term
and the Classical School which looks at the long term).
We can explain this positive slope
using the Philips curve: if production increases (unemployment
decreases), prices increase.
According to the Keynesian school, the slope of the supplied
aggregate in the short term is horizontal, whilst according to
the Classical School in the long term the slope is vertical.
a) Keynesian School
In the very short term, the slope
of the supply curve is horizontal. In the short term, salaries
are rigid, they don't change, which means the prices of products
don't vary either (companies are supposed to fix their prices
by adding a margin of their production costs).
Companies will be willing to offer
everything that is demanded at the existing prices, they will
not try and increase prices.
However, this school admits that
when we are not talking about the short term, maybe the short-medium
term, salaries can rise: if companies want to produce more they
will need more labour force and the increase in demand will
help increase salaries, which will also cause the prices of
products to increase and will make the Aggregate Supply curve
start to adopt a positive slope.
b) Classical School
The Classical School centres its analysis
in the long term and it believes that the supply curve has a
totally vertical slope. According to this school any economy
will always be with full employement, for this reason the volume
of products offered to the market will always be the maximum
capacity allowed, independent of the level of prices.
According to the Classical school,
balanced production is determined by offer (the level of production
allows a level of full employment) and not by demand.
My darling students (maybe I'm being
too optimistic using the plural)...Is anyone out there??...ah
you, but what are you doing with the vacuum? ah, are you the cleaning
man?...where are you my students?
