Supply Of Supply And Demand Essay

836 Words Nov 10th, 2015 4 Pages
While reviewing the aggregate level of supply and demand, many of the same principles of basic supply and demand apply to this cycle. Aggregate supply is defined as “a schedule or curve showing the relationship between a nation’s price level and the amount of real domestic output that firms in the economy produce” while aggregate demand is “a schedule or curve that shows the various amounts of real domestic output that domestic and foreign buyers desire to purchase at each possible price level.” It has an inverse relationship, due to the Real Balances Effect, the Interest Rate Effect, and the Foreign Purchases Effect. Aggregate supply schedules can be categorized in three ways based on the flexibility of the input and output prices. In the immediate short run, both the input and output prices are fixed. This period can last anywhere from a few days to a few months. Since 75% of the firm’s costs are wages and salaries, fixed labor contracts are almost always involved. Setting prices for customers causes fixed output and agreeing to supply whatever quantity demanded results at those fixed prices. An example is when a catalog sets fixed prices for home appliances such as refrigerators and dishwashers, and has to produce however many appliances the customer wants to buy. This graph would be a horizontal line, as the shape implies that the total amount of output supplied in the economy depends directly on the volume of spending that results at price level P1. Aggregate…

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