Aggregate supply.

In plain English

Aggregate supply describes the economy's production side, and economists split it into a short run where higher prices pull out more output and a long run where output is fixed by real capacity. Short-run aggregate supply slopes up because wages and some prices are slow to adjust, so a higher price level widens margins and encourages more production. Long-run aggregate supply is vertical, set by labor, capital, and productivity rather than by prices. Supply shocks, such as a jump in energy costs, shift the short-run curve and can raise prices while cutting output at the same time. That combination is what makes supply-driven inflation harder to treat than demand-driven inflation.

01Why it matters

When prices rise because supply got tighter rather than because spending surged, cooling demand does less to fix it, which is why the cause of inflation shapes what happens to jobs.

02The math, step by step

Say an economy can produce $1,000 billion of output at full capacity. A shipping disruption raises input costs, so at any given price level firms now produce $960 billion. Output falls 4 percent while prices rise, a squeeze coming from the supply side.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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