Unit 3 - Aggregate Supply

What is Aggregate Supply
The level of real GDP (GDPr) that firms will produce at each price level (PL)
Real GDP= Out put

Long run v Short run AS

Long Run

• period of time where input prices are completely flexible and adjustments to change in the price level
• in the Long run, the level of real GDP supplied is independent of the price level

Short Run

• period of time when input prices are sticky and do not adjust to changes in the price level
• in the Short-run, the level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS)

• the long run aggregate supply or in the economy (analogous to ppc)
• Because input prices are completly flexible in the long-run changes in the price level do not change firm's real profits and therefore. do NOT Change firms level of full employment

 

 

Short Run Aggregate Supply (SRAS) 

• Because input prices are sticky in the short run, in the SRAS is upward sloping
• an increase in  GDPr, a decrease goes to the right and left
• The key to understand shifts in SRAS is per unit cost of production.

Per unit cost of production
total input/ total output = per unit cost of production

Changes in SRAS (decreases)
Determinants of SRAS (all following affect production cost)

• input prices
• productivity
• legal-institution environment

Input Prices

Domestic Resource Prices

• Wages (75% of all business cost)
• Cost of capital
• Raw material (commodity prices)

Foreign Resource Prices

• Strong $ = lower foreign resources prices
• Weak $ = higher foreign resources pries

Market Power

• -Monopoly and cartels that control resources
• Increases in resource prices in= SRAS shifts <-
• Decreases in resource prices= SRAS shifts ->

Productivity
productivity = total out put/ total input

• more productivity= lower unit production cost = SRAS shifts ->
• lower productivity = higher unit production cost= SRAS shifts <-

Legal- Institutional Enviornment

• Taxes ($ to gov't) on business increase per unit production cost = SRAS shifts <-
• Subsides ($ form gov't) to business reduce per unit productivity cost = SRAS shifts ->

Government Regulation

• Government regulation creates a cost of compliance = SRAS shifts <-
• Deregulation reduces compliance cost = SRAS shifts ->