Unit 3: Aggregate Supply

Aggregate Supply: The level of real GDP (GDPR)  that firms will produce at each price level (PL)

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Long Run v. Short Run

Long Run

  • period of time where input prices are completely flexible and adjust to changes in the price level, always vertical
  • the level of real GDP supplied is independent of the price level
  • the Long-Run Aggregate Supply (LRAS) marks the level of full employment in the economy (analogous to PPC) 
  • vertical
Short Run
  • period of time where input prices are sticky and do not adjust to changes in the price level
  • the level of real GDP supplies is directly related to the price level
  • because input prices are sticky in the short-run, the Short-Run Aggregate Supply (SRAS) is upward sloping
  • upward sloping 
Changes in SRAS 
  • an increase in SRAS is seen as a shift to the right
  • a decrease is seen as a shift to the left
  • the key to understanding shifts in SRAS is per unit cost of production
  • per-unit production cost = total input cost/total output 
Determinants of SRAS

Input Price
  • domestic resource prices (wages - 75% of all business costs, cost of capital, raw materials - commodity prices)
  • foreign resource prices (strong $ = lower resource prices, weak $ = higher foreign resource prices)
  • monopolies and cartels that control resources control the price of those resources (decreases in resource price = SRAS ←, increases in resource prices = SRAS →)
Productivity (total output/total inputs) 
  • More productivity = lower unit production cost = SRAS →, lower productivity = higher unit production cost = SRAS ←
Legal-Institutional Environment 
  • taxes and subsidies (taxes: money to govt. - on business increase per unit production cost = SRAS ←, subsidies: money from govt. - to business reduce per unit production cost = SRAS →)
  • government regulation (government regulation creates a cost of compliance = SRAS ←, government deregulation creates opposite effect)  

Comments

  1. Imani R.April 4, 2018 at 4:22 PM

    Your visual is clear on the movement of an AS curve! Overall, great notes but I want to know more about the three ranges! Keynesian (levels of output that are less than the full employment output), intermediate (resources are getting closer to the full employment level), and classical (where any increase in demand will result in only an increase in prices) - these ranges are essential to determine the status of production in the markets. Don't forget to mention this stuff!

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