Explaining the Keynesian Aggregate Supply Curve

This short revision video looks at the Keynesian aggregate supply curve

What is the Keynesian Aggregate Supply Curve?

The Keynesian aggregate supply curve is non-linear where the elasticity of aggregate supply is dependent in part on the level of spare productive capacity at different stages of a nation’s economic cycle.

What helps to explain the Keynesian Aggregate Supply Curve?

When spare capacity is high, aggregate supply will be elastic: this means that a rise in aggregate demand can be met easily by increased output and there is little threat of rising prices (inflation)

The elasticity of the aggregate supply curve falls as a country moves through an economic cycle:

• The amount of spare capacity declines
• There is the possibility of diminishing returns in production
• Bottlenecks appear in the supply of key inputs including skilled labour

When AS is perfectly inelastic, an economy is at full capacity (equivalent to being on the PPF boundary); this means that further increases in AD are purely inflationary in the short run with little extra real output