Aggregate supply curves plot the relationship between inflation (or the price level) and output from the suppliers (company’s) perspective (handout and powerpoint). The curve is upward sloping because higher prices call forth more output – as less efficient firms can afford to enter the market. The whole curve shifts outwards if any increase in costs to company’s raise the price they need to charge for their products: that cost could be wages, regulations, raw materials, or interest payments on their debt. Governments particularly since Mrs Thatcher (1979-91) have been keen to strengthen the supply side – by improving incentives to work (the supply of labour) by improving the capital markets (supply of capital) or competition in the goods and services markets (supply of aggregate output). As firms invest more so productivity of labour should improve and economic capacity rise – we find our production possibility frontier shifts outwards. But what determines investment? Here we have a powerpoint and handout explaining this. Remember the eternal economic truth – in the long run productivity growth is almost all that matters for the wealth of an economy. Notice also that investment is both a demand and supply-side influence – it is a component of aggregate demand (see core concept 1, the circular flow) and yet has a crucial influence on the level of aggregate supply.

And finally, as we put demand and supply curves together we come up with a theory of inflation whereby economies, nearing full capacity, will see prices start to rise. And where costs also rise, we can isolate two independent but often interlinked influences on inflation: demand pull and cost push. In 2015 there are still notable examples of hyper-inflationary economies – Venezuela is worth watching as an experience to avoid.