I was just wondering how Infrastructure can impact on Aggregate Supply. More specifically, how does the improvement of infrastructure improve Aggregate Supply?
Aggregate supply is typically modelled as
$$ Y = F(A, K, L) $$
$Y$ = total production
$L$ = labour input
$K$ = capital input
$A$ = total factor productivity
Investment in infrastructure can increase both capital input $K$ and total factor productivity $A$. In a standard $AS - AD$ model, the aggregate supply curve would shift to the right, as a result, and the equilibrium output of the economy would increase.
Investment in infrastructure can increase capital input, because if there are more roads in the country, the economy can produce more goods and services (think about a truck company, for example, which can do more jobs per day if its trucks travel on more direct roads or faster highways).
It can also increase total factor productivity, because the proportional increase in output is potentially higher than the proportional increase in capital input. If with a short road I link a town to a national highway network, the benefits can be disproportionally high, as a short road link now provides access to a huge existing highway network. Or think about the 50 mile Panama Canal. It provides ships an 8,000 mile shortcut.