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Aggregate Supply Function

Aggregate supply in an economy refers to the total volume of all goods and services available for consumption and investment.

We know that the money value of all goods and services produced in an economy is known as national product or output.

National product also represents the total of the payments made to the four factors of production, viz, land, labour, capital and organisation.

The minimum expected sale proceeds which necessary to induce firms to produce an output and to provide employment to a certain number of works are the aggregate supply price of that output.

The income of the factors of production also constitutes the expenses incurred by all the firms taken together on the various goods and services produced at a given level of employment.

The firm will maintain this level of employment only if all of them taken together can earn sufficient income to meet the expenses (or the costs) being incurred on the factors of production. In other words, there is minimum level of employment. A schedule of such minimum sale produces is known as the aggregate supply function or the aggregate supply schedule.

Thus, the aggregate supply can be defined as the total amount of money receipts which the firms in the economy taken together ‘must receive’ from the sale of their product at a varying levels of employment.

Relationship between Aggregate supply and the level of Employment. The aggregate supply price is positively related to the level of employment. It increases with an increase in the level of employment and vice versa. Thus, the aggregate supply schedule, like the aggregate demand schedule, is also an increasing function of the level of employment.