aggregate supply on national income

Aggregate Supply and National Income: Understanding the Relationship

Aggregate Supply (AS) represents the total quantity of goods and services that producers in an economy are willing and able to supply at different price levels. National Income (Y), on the other hand, refers to the total income earned by all factors of production (labor, capital, land, and entrepreneurship) in an economy over a given period.

The relationship between Aggregate Supply (AS) and National Income (Y) is fundamental in macroeconomic analysis, particularly in determining economic equilibrium.

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1. Short-Run Aggregate Supply (SRAS) and National Income
In the short run, AS is upward-sloping because:
– Firms increase production as prices rise (higher profits).
– Wages and input costs are sticky (do not adjust immediately).

Impact on National Income:
– When AS increases (shift right), firms produce more goods & services → higher employment → higher national income.
– When AS decreases (shift left), production falls → unemployment rises → lower national income.

Factors Shifting SRAS:
– Cost of Production (wages, energy prices, taxes)
– Technology & Productivity
– Supply Shocks (e.g., natural disasters)

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2. Long-Run Aggregate Supply (LRAS) and National Income
In the long run, AS is vertical because:
– The economy operates at full employment (potential GDP).
– Prices adjust fully; only real factors (technology, labor, capital) determine output.

Impact on National Income:
– LRAS represents the maximum sustainable output → determines long-run national income.
– Changes in LRAS (economic growth) come from:
– Increased labor force
– Capital accumulation
– Technological progress

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3. Equilibrium: Where AS Meets AD
The intersection of Aggregate Demand (AD) and AS determines:
– The equilibrium price level (P)
– The equilibrium level of national income (Y)


Key Takeaways:
1. In the short run, changes in AS affect both prices and national income.
2. In the long run, only real factors influence national income.
3. Policies acting productivity or costs can shift AS, altering national income.

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Conclusion
Aggregate Supply plays a crucial role in determining national income:
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