AGGREGATE SUPPLY

AGGREGATE SUPPLY

Definition: Aggregate supply refers to money value of final goods and services that all the producers are willing to supply in an economy in a given period.

The concept of aggregate supply (ΔS) is related with the total supply of goods and services by all the producers in an economy. Four factor of production like land, labour, capital and enterprise are required for the production of goods and services. Producers pay rent to land, wages and salaries to labour, interest to capital and Profits to the entrepreneur for their services in production. This payment is factor- cost from producer’s point of view and factor-income from factor-owner angle.

Thus, aggregate supply is the total amount of money value of goods and services, (which is paid to the factor of production against their factor services) that all the producers are willing to supply in an economy. In other words, it is the total cost of production of goods and services produced in a country or it is the value of net national product at factor cost (NNP_FC). We can say Aggregate Supply (AS) = National Income (Y)

Keynes assumed his economy to be a closed capitalist economy and whenever any economy is closed capitalist, then Net Factor Income from Abroad (NFIA) is zero. National Income (NNP_FC) = Domestic Income (NDP_FC) + Net Factor Income from Abroad (NFIA)
National Income (NNP_FC) = Domestic Income (NDP_FC) + 0
In short,
Aggregate Supply = NNP_FC = NDP_FC = Factor Income = Rent + Interest + Wages + Profit

As we know income is either consumed or saved, hence for the sake of simplicity Keynes has regarded only two main constituents of aggregate supply:

NATIONAL INCOME (Y) = CONSUMPTION + SAVING

Y = AGGREGATE SUPPLY = CONSUMPTION + SAVING

Aggregate Supply Schedule and Diagrammatic Representation:

In the above figure, income is represented on the X-axis and consumption and saving are measured on the Y-axis. A 45-degree line, which represents the Aggregate Supply, has been drawn from the origin. At every point on this 45 degree line, Y = C + S.