The Aggregate supply has diverse views about it shape. The simple Keynesian view on the shape of aggregate supply curve is that, at any given point in time, the economy has a defined capacity or maximum output.
The maximum output is defined to be the existing labor force, current capital stock, land and existing state of technology. Now if the planned (desired) aggregate expenditure increases, and its greater than the aggregate output then inventories will be lower than planned so the firms will respond to this by increasing their output. if the economy is producing below its maximum capacity i.e. some factors of production are unemployed, then firms will employ these idle factors of production to increase their output and this will not exert any upward pressure on the prices of the factors of production. That means the prices of the factors of production remain constant, so at the same price level firms can produce different output.
However, if planned Aggregate expenditure rises and the economy is producing at its maximum, i.e. it is utilizing its factors of production such that none is left idle, then inventories will decrease which implies firms should increase their output but they cannot increase their output because of scarcity of factors of production this will increase the price level or inflation.
With planned aggregate expenditure of AE1 and aggregate demand of AD1, equilibrium output is Y1. A shift of planned aggregate expenditure to AE2, corresponding to a shift of the AD curve to AD2, causes output to rise but the price level to remain at P1. If planned aggregate expenditure and aggregate demand exceed YF, however, there is an inflationary gap and the price level rises to P3.
Source: Principles of Economics (Horizon Edition).
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