What is Aggregate Supply?

Aggregate supply (AS) refers to the total quantity of goods and services that producers in an economy are willing and able to supply at various price levels. Increases in aggregate supply are crucial for sustained economic growth, as they reflect an economy's enhanced productive capacity. Factors contributing to increases in AS include improvements in efficiency and technological advancements.

Improvements in Efficiency

Efficiency improvements refer to the ability to produce more output with the same amount of inputs. This can occur through better management practices, enhanced worker skills, or optimised production processes. For example, in Australia, the mining sector has seen significant efficiency gains. Between 2017 and 2023, labour productivity in the mining sector increased by 15%, driven by advancements in automation, operational efficiencies, and the transition from construction to production phases in major projects. As a result, improvements in efficiency enable an economy to increase its aggregate supply.

Improvements in Technology

Technological advancements allow for the production of more goods and services with the same amount of resources, or the creation of entirely new products and industries. For example, in the Australian mining industry, autonomous haulage systems have been implemented. This has occurred specifically in Western Australian iron ore mines, which have increased productivity by 20% while improving safety. Furthermore, Australian technological improvements have dramatically reduced the cost of solar and wind energy. The cost of utility-scale solar PV in Australia decreased by 82% between 2010 and 2020.

How Does Aggregate Supply Impact Economic Growth?

Increases in aggregate supply driven by technological advancements and efficiency gains have significantly contributed to Australia's economic growth. Higher aggregate supply means that the economy can produce more goods and services, leading to higher GDP and improved living standards. For example, the Australian mining sector has seen substantial increases in output due to the adoption of advanced extraction technologies and automation. Between 2022 and 2023, the mining sector's productivity increased by 21.6%, significantly contributing to national economic growth.

Furthermore, the sector also delivered a record $455 billion in export revenue during the 2022-23 financial year, underscoring its vital role in the Australian economy. These advancements have not only boosted productivity but also reinforced the mining sector's importance to Australia's GDP and export performance.

What is the Relationship Between Aggregate Supply and Inflation Control?

Improving aggregate supply helps control inflation. When the economy can produce more, it meets higher demand without pushing prices up. This balance is crucial for maintaining stable economic growth. For example, in the post-pandemic period, Australia's ability to ramp up production in key sectors helped moderate inflationary pressures, ensuring that economic recovery did not lead to runaway inflation.