General economic supply

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The term macroeconomic supply (also total supply , aggregated supply ) describes the amount of goods that the sum of all providers on the market produce in a certain period of time and in a certain macroeconomic situation. An overall economic equilibrium can be derived from its interaction with overall economic demand . A price-quantity relationship is usually shown in graphical representation. This can vary depending on the underlying economic theory .

Expressions

In a price-quantity diagram, the aggregated supply function typically shows a positive trend - a higher price also results in a larger overall economic supply.

According to classical theory , the quantity of supply cannot be derived from the price, but exclusively from real factors, which, under certain assumptions, can lead to a horizontal supply function.

According to the Keynesian interpretation ( IS-LM model ), the total supply is adjusted to the total demand - the supply function therefore develops horizontally. The aggregated supply function represents the supply part of the AS-AD model .

Derivation

The overall supply function in the macroeconomic sense results from the following influencing variables. It shows the price level change caused by the changes in production. The temporary adjustment of wages and prices is essential.

The nominal wage depends on the following factors: unemployment rate , expected price level and other factors that have an influence on wage setting. The price level resulting from the pricing behavior of companies and consists of the nominal wage and the mark-up together. A function can be derived from the price and wage setting equation that represents the relationship between price level, production and the expected price level. That is, the lower the unemployment rate for a given workforce, the higher the production.

The aggregated supply function therefore corresponds to a “labor market function”, since decisions of the labor market are mapped here. Accordingly, this function represents a positive relationship between price and production. The price level depends positively on the price expectations and the production level.

Two characteristics shape the price level: First, an increase in production leads to an increase in the price level. As production increases, so does employment. This reduces unemployment and, as a result, the unemployment rate. A better negotiating position of employees increases nominal wages. The rise in nominal wages also increases the cost of production, which leads to an increase in the prices of individual firms. This increases the overall price level.

The second property of the price level describes the simple relationship between the price level and the expected price level. If a higher price level is expected when setting wages, a higher nominal wage is set in order to enforce a higher real wage. The overall price level rises as soon as individual providers raise their prices as a result of increased labor costs.

General influencing factors

The aggregated supply depends on the independent influencing factors labor and capital input as well as the available mineral resources and production technologies. Due to the interaction of total demand and supply, the economic production volume, employment and price level depend. That is, gross domestic product (GDP), unemployment, and inflation are affected by this interaction .

It is assumed that the providers want to produce the maximum, i.e. potentially possible, output. However, the opposite cases are also possible in which the production capacity is deliberately not fully used. Reasons for this can be that production costs are considered too high or the yields to be achieved are too low. One consequence of this is a non-utilization of existing production factors .

The following situation is also possible. Companies want to produce more than existing production factors allow. This situation occurs because of low production costs or very high goods prices to be expected. If the goal of increasing production cannot be achieved due to limited capacities, the price level must be raised in this economy.

In the following, the total supply is considered through the relationship between price level and overall economic production capacities . The cost situation and capacity utilization are therefore assumed to be given. Building on this, the course of the total supply curve in the price-quantity diagram is examined. Influences on GDP, price levels and employment can be derived from this.

Properties of the aggregate supply function

The total supply function can be characterized by three essential properties. The increase in production is characterized by an increasing total supply curve based on a simultaneous increase in the price level. The actual price level corresponds to the expected, provided that the production represents the natural production level. The calculations are based on the natural unemployment rate, which is based on the equilibrium between the expected and actual price level. In this case the production is also equal to the natural production level. This means that in the case of production above the natural level, the price level is higher than expected, but if it is below this level, a lower price level occurs.

The third characteristic includes changes in price expectations that lead to a horizontal shift in the aggregated supply curve. That means with constant unemployment rate and production, higher price expectations lead to rising wages and thus higher prices. This applies to every level of production and is consequently the cause of the horizontal shift in the curve.

Individual evidence

  1. ↑ Hanusch, Horst / Kuhn, Thomas / Cantner, Uwe: Economics 1 - Fundamental Micro and Macroeconomics . 2002, p. 268.
  2. ↑ Blanchard, Olivier / Illing, Gerhard: Macroeconomics . 2003, pp. 205 to 206.
  3. ↑ Hanusch, Horst / Kuhn, Thomas / Cantner, Uwe: Economics 1 - Fundamental Micro and Macroeconomics . 2002, pp. 268 to 269.
  4. ↑ Blanchard, Olivier / Illing, Gerhard: Macroeconomics . 2003, pp. 206 to 209.

literature

  • Horst Hanusch, Thomas Kuhn, Uwe Cantner : Economics 1 - Fundamental Micro and Macroeconomics . 6th edition. Springer, Berlin 2002, ISBN 3-540-43288-4
  • Olivier Blanchard, Gerhard Illing: Macroeconomics . 3. Edition. Pearson Studium, Munich 2003, ISBN 3-8273-7051-5