Chapter 18: Problem 665

How does one arrive at the aggregate supply curve (for an entire industry)?

Short Answer

Expert verified

To arrive at the aggregate supply curve for an entire industry, first understand the concept of aggregate supply as the total output of goods and services that firms in a given industry are willing and able to supply at different price levels. Then, identify individual firm supply curves and sum them up by adding the quantities supplied by each firm at each price level. Graph the aggregate supply curve by plotting the combined quantities supplied at each price level. Finally, analyze the shape of the aggregate supply curve, which may vary depending on the production behavior and other factors influencing the firms in the industry.

Step by step solution

Understand the concept of aggregate supply

Aggregate supply refers to the total amount of goods and services that producers are willing and able to supply at various price levels. In the context of an industry, aggregate supply is the combined output of all the firms in that industry given the prevailing market prices. It helps us understand the overall supply and production capacity of an industry.

Identify individual firm supply curves

Each firm in an industry has its own supply curve, which shows the relationship between the quantity of goods and services that the firm is willing to supply at different price levels. We need to first identify the individual supply curves of each firm in the industry.

Sum up individual firm supply curves

To create the aggregate supply curve for an industry, we need to sum up the individual supply curves of all the firms in the industry. This can be done by adding the quantities supplied by each firm at each price level. For example, if there are two firms (A and B) in an industry, and Firm A supplies Q_A goods at price P, while Firm B supplies Q_B goods at the same price, the aggregate quantity supplied by the industry at price P (Q_total) would be Q_A + Q_B.

Graph the aggregate supply curve

Once we have summed up the individual supply curves, we can represent the aggregate supply curve graphically. On the horizontal axis, we plot the aggregate quantity of goods and services supplied, while on the vertical axis, we plot the price level. Plot the points representing the combined quantities supplied by the firms at each price level, and then connect those points to create the aggregate supply curve.

Analyze the shape of the aggregate supply curve

The shape of the aggregate supply curve depends on the production behavior of the firms in the industry. In the short run, the aggregate supply curve may be upward sloping, indicating that firms produce more when prices are higher. In the long run, the curve may become more vertical, as firms can adjust their production capacity to maximize profits at different price levels. By following these steps, one can arrive at the aggregate supply curve for an entire industry. It is crucial to remember that the aggregate supply curve represents the combined supply decisions of all firms in the industry and can be influenced by various factors, such as production costs, technology, and government policies.