Aggregate supply refers to the total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Typically, there is a positive relationship between aggregate supply and the price level. Aggregate supply is usually calculated over a year because changes in supply tend to lag changes in demand.

In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process. In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency. Instead, the company ramps up supply by getting more out of its existing factors of production, such as assigning workers more hours or increasing the use of existing technology. Once this point is reached, supply becomes insensitive to changes.

Aggregate demand, on the other hand, refers to the amount of total spending on domestic goods and services in an economy. The aggregate demand curve shows the total quantity of output that firms will produce and sell at each price level. Aggregate demand includes all four components of demand: consumption, investment, government spending, and net exports.

The concept of aggregate supply is most often used in discussions about a business cycle. Aggregate supply and demand refers to the concept of supply and demand but applied at a macroeconomic scale. The aggregate supply curve measures the relationship between the price level of goods supplied to the economy and the quantity of the goods supplied. In the short run, the supply curve is fairly elastic, whereas, in the long run, it is fairly inelastic (steep) [[5]](https://corporatefinanceins...