Civil Engineering Reference
In-Depth Information
Figure 13.3
The aggregate supply curve
At a price level of P
1
, the AS curve is a horizontal line up to the point where output is Y
1
.
Then, there is an intermediate stage - some sectors of the economy are experiencing
excess capacity, but others are not. At Y
2
there is no immediate capacity in any sector of
the economy and prices rise. In the long run, however, it should be possible to increase
productive capacity and shift the AS curve towards the right.
AS
1
AS
2
No excess
capacity
P
2
P
1
Excess
capacity
Some
excess
capacity
Increased
capacity
Y
1
Y
2
Y
3
National income and output
UNUSED CAPACITY
When an economy has many factories operating at less than capacity, there is a
general under-utilisation of the productive capabilities and it is possible to increase
output without any pressure on prices. If there is unused capacity, producers can
increase supply without having to pay higher prices for factors of production. If
they need more labour, they can hire someone who is unemployed - they do not
need to pay higher wages to attract people. Providing there are significant levels
of unemployment and unused capacity, per-unit costs of output remain the same,
no matter what the volume of output. In these circumstances, we would expect the
aggregate supply curve to be a horizontal line at the current price level. Consider a
line labelled 'excess capacity' represents that part of the aggregate supply curve AS
1
where an increase in output causes no pressure on prices. Within this range, supply
is perfectly elastic.
NO EXCESS CAPACITY
Now consider the other extreme, in which the economy is running at full capacity
and there is no unemployment. In such a situation it is impossible for any additional
output to be produced. There is only one thing that can happen - the price level can
rise, but no further increases in output are physically possible. The aggregate supply
