3. Aggregate Supply

Aggregate supply refers to the total amount of goods and services that producers are willing and able to supply at a given price level. The aggregate supply curve shows the relationship between the price level and the quantity of output that firms are willing to produce and sell. The aggregate supply curve is upward sloping in the short run, indicating that as the price level increases, firms are willing to produce more output.

In the long run, the aggregate supply curve is vertical, indicating that the level of output is determined by the economy's potential output, which is determined by the availability of resources, technology, and institutions. In the long run, changes in the price level do not affect the level of output, as firms adjust their production to the economy's potential output.

4. Equilibrium

Equilibrium in the aggregate market occurs when the quantity of aggregate output demanded equals the quantity of aggregate output supplied at a given price level. The intersection of the aggregate demand and aggregate supply curves determines the equilibrium level of output and price level.

If the aggregate demand curve shifts to the right, indicating an increase in aggregate demand, the equilibrium level of output and price level will increase. If the aggregate demand curve shifts to the left, indicating a decrease in aggregate demand, the equilibrium level of output and price level will decrease.

If the aggregate supply curve shifts to the right, indicating an increase in aggregate supply, the equilibrium level of output will increase, but the price level will decrease. If the aggregate supply curve shifts to the left, indicating a decrease in aggregate supply, the equilibrium level of output will decrease, but the price level will increase.

In summary, the aggregate demand and aggregate supply model is a useful tool for understanding how changes in the economy's demand and supply affect the level of output and price level. The equilibrium level of output and price level is determined by the intersection of the aggregate demand and aggregate supply curves.