Aggregate Supply Price

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Aggregate Supply Price or Aggregate Supply

The maximum production capacity or the potential GDP of an economy being given and fixed, the extent to which this capacity is being actually utilised, or the volume of actual GDP produced, depends upon how much proceeds or revenue the entrepreneurs, as a whole, expect from selling various amounts of output. In microeconomics supply price of a good refers to the minimum price at which a producer is willing to produce and sell a good. This is the price that just covers his cost of production (including normal profits.) He will not produce if he does not expect to sell at this minimum price. Thus, there is a certain minimum amount of revenue (p X q) that the producer must expect to get to continue in production which is called his supply price. Similarly, in macroeconomics the terms aggregate supply or aggregate supply price refers to the amount of output (GDP) which the entrepreneurs intend to produce in response to different amounts of expected total revenue. If the entrepreneurs expect a higher aggregate expenditure by all the buyers, they will be induced to expand amount of output produced and thus increase the aggregate supply. If, on the other hand, the producers as a whole expect a smaller expenditure by the buyers, (i.e., a lower aggregate expenditure) their expected total revenue will be lower and hence they will be obliged of production of GDP. Aggregate supply, thus, depends upon the expected total revenue of the producers as a whole. It shows total output which all the entrepreneurs in the economy, taken together, intend to produce at different amounts of expected aggregate expenditure of all the spending groups, which in turn, forms their own expected total revenue.


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