Posted by Anjali Kaur on Sep 29, 2020

Aggregate Supply

Aggregate supply refers to the money value of final goods and services that all the producers are willing to supply in an economy during a given period of time. I will recommend you to read my post on the Aggregate Demand before going through this. Let’s learn more about it.

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Aggregate supply or national income

We generally refers Aggregate supply as equal to the national income.

AS = Y

This is because, National income only comprises of final goods which are produced in an economy at a particular time period.

Components of AS or Y

The major part of national income is spent on consumption of goods and services and the remaining is saved.

It means that income is either consumed or saved.

AS = C + S

Y = C + S

Diagrammatic presentation of AS

Let’s have a look at the table containing Y, C, S and AS

YCSAS = C+S
040-400
100120-20100
2002000200
30028020300
40036040400

Important points on Aggregate Supply

  1. AS is a straight line, starting from origin, creating an angle of 45 degrees.
  2. The AS curve and national income coincide with each other.

Saving Function

It refers to the functional relationship between savings and the level of income.

S = -c +sY

Where,

S – Saving function

-c – Dissaving

s – Marginal propensity to save or the slope of the saving curve

Y – National income

What is dissaving?

Dissaving means spending money more than the income because of dissaving the saving functions starts from the negative intercept. As shown below:

Saving Function - Businesstopia

Important points on Saving Curve

  1. The saving curve starts from Y’ axis, indicating that there is negative saving when national income is 0. This is also known as dissaving.
  2. Saving curve has a positive slope indicating direct relationship between income and saving.
  3. The break-even point is reached, when saving curve crosses x-axis. That is S = 0, when C = Y.
  4. After the break-even point, savings becomes positive. Similarly, before the break-even point savings was negative.
Draw consumption curve and saving curve in a single diagram and mark the  break-even point Now what - Economics - Determination of Income and  Employment - 3335995 | Meritnation.com

Thank You for reading.

You can read the related post on macroeconomics:

Aggregate Demand

Introduction To Money

Central bank and its function

Process of credit creation

Precautions while calculating the national income

Real and nominal GDP

National income

National income formula list

Value-added method

Income method

Expenditure method

GDP and welfare

Domestic territory and national residents

Circular flow of income

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