Question

Write explanatory answer.
What is 'aggregate supply'? Explain the determinants of aggregate supply.

Answer 1

Meaning: -It is the total output of goods and services produced and supplied in the economy during a given period of time. It is an important element of macroeconomic analysis. Aggregate supply depends on the availability and use of factors of production like natural resources (N), Labour (L), Capital (K), and the state of technology (T).

Definition: - According to J.M Keynes “Aggregate supply refers to the total quantity of goods and services which can be produced with available factors of production, i.e., land, labour, capital, and organisation”.                                         

Thus aggregate supply = f (N, L, K, T)

N = Natural resources             (which is considered to be constant)

L = Stock of Capital  (which is considered variable)

K = Supply of labour              (which is considered to be constant)

T = State of Technology         (which is considered to be constant)

The main determinants of the aggregate supply are briefly explained as follows:-

1. Natural Resources: -Natural Resources refer to all kinds of resources, which are freely available in the nature and used in the process of production. They include land, climatic conditions, rainfall, water resources, sunshine, and minerals deposits. Etc. total production of goods and services in the economy depends on the availability of natural resources as well as their utilization. Since it is difficult to change the size of the natural resources, theyare considered to be constant.
2. Supply of Labour: -It refers to total labour force and human resources (HR) available and used in the production of goods and services in the economy. The supply of labour depends on the size of the population, age composition of the population, education and training of the labour force. The size of and efficiency of the labour are very essential for increasing production. It is assumed that the supply of labour can be changed in the short run.
3. Capital: -Capital is the produced means of production. It is a man-made factor of production. The aggregate supply of goods and services produced in the country depends on the availability and use and quality of capital. Therefore, more the capital more is the supply of goods, and less capital available, less would be the supply.The stock of capital is considered to be constant in short period.
4. State of Technology: -The state of technology implies the application of modern and advanced techniques and methods in the production process. The application of improved technology increase overall productivity. In the short term, the state of technology is assumed be constant.