Definitions

Although the term "aggregate supply" is often used, we want to avoid confusing the macroeconomic relationship with supply in microeconomics, which is quite different. To keep things separate, we will use a somewhat different terminology. Recall the definitions of the Friedman Curve and the Pigou Curve from an earlier chapter:

Pigou Curve: The Pigou Curve is a curve that shows the relationship between the price level and the GDP, showing each respective price level and the quantity of goods and services that people want to buy.; It is downward sloping.; It is also sometimes called the "Aggregate Demand" curve.
Friedman Curve: The Friedman Curve is a curve that shows the relationship between the price level and the GDP, showing each respective price level and the real GDP that businessmen are willing to sell at that price level.; It is upward sloping.; It is also sometimes called the "Short Run Aggregate Supply" curve.
Equilibrium: The "equilibrium" is the intersection of the Pigou Curve and the Friedman Curve, that is, the price level high enough that the RGDP that businessmen want to sell is the same as the RGDP that customers want to buy.

In this chapter we will take the Pigou Curve as given and look into the Friedman Curve in more detail.

As we see, the Friedman Curve is a relationship between the price level and the RGDP that businessmen want to sell. There are two ways the relationship can be interpreted. "New Classical" economists (including Milton Friedman, from whom we get the idea) would interpret it this way: for any given price level, it tells us how much real GDP businessmen will find it profitable to sell. Some "New Keynesians" would say that, for any given RGPD, it tells us how much businessmen would charge for that output. The "New Classical" version assumes that businessmen act, on the whole, as if markets were very highly competitive and they have little control over price. But some of the "New Keynesians" are pretty skeptical about that, feeling that businessmen mostly can and do set their prices.

For our purposes, it's not going to make much difference. Our idea is that the definition of the Friedman Curve will work equally well regardless whether businessmen set prices or respond to them (or a little of both).

More Differences from a Supply Curve