Talk:Aggregate supply

Untitled

This page really needs to be cleaned up.

Added cleanup.Smallman12q (talk) 14:20, 24 January 2009 (UTC)

Probably the most pathetic article on Wikipedia

I'm making this comment so that it might spark incentive in someone with a good understanding of the topic to rewrite this article. All I want to say is: I came here to learn something, not find out the opinion of one particular book. Andeosr (talk) 05:50, 10 November 2021 (UTC)

Key flaws and an outline for improvement

This article is quite confused. I am a brand new editor, but I have suggestions for a rewrite. I am also able to provide ample citations where required. I'd be happy to work on something more concrete, but would prefer to do so with a more experienced editor.

My concerns:

• Aggregate supply (AS) in macroeconomics isn’t a single quantity; it is the relationship between total real output and the overall price level. It should be introduced as that relationship, with micro‑foundations discussed later. It must not be conflated with individual firm or market supply curves.
• The AS curve maps directly onto the Phillips curve, reflecting the same underlying mechanism while focusing on different outcomes (via Okun’s law). These two topics should be linked closely in the article.
• The “Data” section should be removed. It cites obscure UK firm‑level input‑output tables, which are not suitable for estimating an AS relationship. Measuring AS elasticity empirically is notoriously difficult, and the data presented does not address that challenge.
• The “Policy” subsection adds little relevance to the theory. It repeatedly mixes up aggregate productivity growth with AS, which is fundamentally a functional relationship, not a growth rate.

Suggested rewrite:

Top line: Aggregate supply is the relationship between the quantity of real goods and services produced in an economy at a given aggregate price level, and it is closely connected with the Phillips curve.

Theoretical Foundations:

• Neoclassical: Lucas islands model
• Monopolistic competition and price/wage rigidity (Calvo, Rotemberg, Taylor)
• Incomplete information: Mankiw and Reis “sticky information”
• Coordination failure

The Role of Expectations:

• The slope of the AS relationship depends on how agents form expectations about future inflation.
• Contrast adaptive, rational, and diagnostic/behavioral expectations.
• Discuss nominal anchoring and central‑bank credibility.

Theoretical Considerations:

• Monopolistic competition: price mark‑ups, wage‑mark‑downs, and anticipated marginal costs.
• Time‑dependence: AS is typically steeper in the long run because of greater price flexibility, better coordination, and factor mobility.
• State‑dependence: Large shocks may cause faster price adjustment and a steeper AS curve; agents have stronger incentives to update prices when inflexibility is costly.
• Central‑bank credibility (see expectations).
• Implications for inflation costs: market power, equilibrium price dispersion, and productive efficiency.

Empirical Issues:

• Real output and price levels are endogenous and their relationship is not policy‑invariant (Lucas critique).
• Identification requires either an observable shock that moves aggregate demand while leaving AS unchanged (instrumental variables) or a structural model with microfoundations (eg. a DSGE).

Important Clarifications:

• AS is a relationship, not a variable.
• No direct link between individual market supply curves and AS; different mechanisms operate.
• Knowing the slopes of all market supply curves does not identify the slope of the AS curve.

Policy Considerations:

• The short‑run price‑output relationship is unstable and cannot be exploited over the long run.
• Central‑bank credibility stabilizes long‑run expectations, reducing the output cost of disinflation.
• Targeting the most sticky prices can lower overall price dispersion.

Criticisms:

• Confusion between treating the AS curve as a structural versus reduced‑form relationship.
• Role of the labor market and wage‑price spirals in amplification (labor‑market tightness is hard to blame for hyperinflations).
• Necessity of sticky prices: empirical evidence on price stickiness is mixed and may not support long-lasting propagation, some models derive AS without sticky prices and can produce efficient price dispersion (Mankiw & Reis, Lagos & Wright, Farmer, etc.).

Recent research:

• Production networks and the transmission of aggregate demand shocks.
• Tariffs on intermediate inputs.
• Measuring expectations across households, firms, financial markets, and policymakers.

Appendix - Outline for Deriving the New Keynesian Aggregate Supply Curve (Calvo):

• Monopolistic‑firm optimization: choose production, labor, and reset price to maximize profit.
• Derive the optimal reset price, impose symmetry, and aggregate.
• Key parameters: reset probability, demand elasticity/markup, elasticity of marginal cost to output.
• As reset probability approaches 1, prices become fully flexible; as demand elasticity rises, the economy approaches perfect competition and monopoly distortions vanish.