employing more men. So aggregate supply curve becomes inelastic (Vertical straight line). The slope of the aggregate supply curve depends on the relation between the employment and productivity. The capital stock is often fixed and hence the law of diminishing marginal returns takes place as more workers are employed.
Based upon this relation, the aggregate supply curve can be expected to slope upwards. In reality the aggregate supply curve will be like Z1 in figure . . Therefore, the aggregate supply depends on the relationship between price and wages.
If prices are high and wages low, the producers will try to employ labourers. If prices are low and wages high, investment will be curtailed, output will fall and there will be a reduction in the productive capacity. Thus aggregate supply is an important factor in determining the level of economic activity. Nf Z z x y Expected Proceeds Employment Figure.
. - - Theories of Employment and Income The concept of effective demand is more clearly shown in the figure . In the figure, the aggregate demand and aggregate supply reach equilibrium at point E. The employment level is N o at that point.
At ON employment, the aggregate supply is N R . But they are able to produce M N . The expected level of profit is M R . To attain this level of profit, entrepreneurs will employ more labourers.
The tendency to employ more labour will stop once they reach point E. At all levels of employment beyond, ON o , the aggregate demand curve is below the