Two Theories of Aggregate Supply:

Aggregate supply is the total supply of goods and services produced within an economy at a given overall price level. There are two main theories of aggregate supply: the Keynesian theory and the neoclassical theory.

Keynesian Theory of Aggregate Supply:
- The Keynesian theory of aggregate supply is based on the idea that prices and wages are sticky in the short run.
- This theory relies on the market imperfection of rigid prices and wages, meaning that they do not adjust immediately to changes in demand and supply.
- In the short run, firms are unable to adjust prices quickly, leading to a situation where output can increase without a significant increase in prices.
- This theory suggests that changes in aggregate demand have a direct impact on the level of output in the economy.

Neoclassical Theory of Aggregate Supply:
- The neoclassical theory of aggregate supply is based on the assumption of flexible prices and wages in the long run.
- This theory relies on the market imperfection of imperfect information, meaning that firms and workers do not have perfect knowledge of market conditions.
- In the long run, prices and wages are flexible and can adjust to changes in demand and supply, leading to a situation where output is determined by the economy's productive capacity.
- This theory suggests that changes in aggregate demand will only lead to changes in prices in the long run, with no impact on the level of output.

Commonalities between the Theories:
- Both theories of aggregate supply focus on the relationship between aggregate demand and the level of output in the economy.
- Both theories acknowledge the presence of market imperfections that affect the adjustment of prices and wages in response to changes in demand and supply.
- Both theories highlight the importance of understanding the short-run and long-run dynamics of the economy in analyzing aggregate supply.