Aggregate Demand and Supply Model

Factors Affecting Aggregate Supply

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Christian Bien


What is Aggregate Supply?

Aggregate Supply is the total supply of goods and services by an economy. 

  • Short Run Aggregate Supply is the total supply of goods and services currently being achieved in the economy 

  • Long Run Aggregate Supply is the maximum supply of goods and services that can be achieved with full employment of resources

What are the Factors Affecting Short-Run Aggregate Supply?

Ultimately, short-run aggregate supply is affected by the change in unit costs of production, that is the cost of producing one unit of good or service in an economy. 

  • Productivity - the level of labour, capital and MultiFactor productivity (see the productivity section for more information). A higher level of productivity means goods and services are being produced more efficiently, decreasing unit costs of production, increasing aggregate supply - 

  • Labour Wage Costs - higher wage costs means that an economy produces less goods and services due to higher costs of production. In Australia, our labour costs are pretty high with a minimum wage of $17.70 per hour (around $13 USD) 

  • Taxes and other costs - costs such as regulation and taxation costs can place a burden on the unit costs of production, lowering the aggregate supply of an economy 

  • Material Prices - higher material prices and other inputs will increase the unit labour costs of production and lower aggregate supply. Material prices can also be imported which is affected by changes in the exchange rate.

Topic Menu
Keynesian AD/AS Model
Concept of Aggregate Demand and Supply
Factors Affecting Aggregate Demand
Factors Affecting Aggregate Supply
Classical AD/AS Model
Effects of Changes in Aggregated Demand
Effects of Changes in Aggregate Supply
Aggregate Demand and Supply Model / Business Cycle
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What are the Factors Affecting Long-Run Aggregate Supply?

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  • Size of the labour force - Australia has a small population for its landmass, a majority of Australia's output capabilities are from capital 

  • Stock of Capital - the amount of capital available in an economy. Australia has a pretty high capital to labour ratio in most industries, especially in mining, where labour is operating multi-million dollar machines 

  • Productivity - a higher level of productivity will mean increases in both short term and long term supply 

  • Level of Technology - The potential output of an economy can be increased through the adaption of new technology, ideas and managerial processes, which can increase the efficiency of resources, thus increasing long-run aggregate supply