Aggregate Supply (AS): The level of Real GDP (GDPR)
that firms will produce at each Price Level (PL)
Long Run vs Short Run
·
Long Run: The Period of time where input prices are
completely flexible and adjust to changes in price level.
o
In the long run, the level of Real GDP
supplied is independent of the Price Level.
·
Short Run: The Period of time where input prices are
sticky and do not adust to changes in the price level.
o
In the short run, the level of Real GDP
supplied is directly related to the Price Level.
Long Run Aggregate Supply
(LRAS): Marks the
level of full employment in the economy. (Analogous to PPC)
·
Because input prices are completely
flexible in the Long Run, changes in price level do not change firms’ real
profits and therefore do not change firms’ level of output. LRAS is vertical at the economy’s level of
full employment (FE / YF / Y*)
Changes in Short Run Aggregate Supply (SRAS)
·
Increase
in SRAS = Shift to the Right
·
Decrease
in SRAS = Shift to the Left
·
Understanding shifts is per unit cost of
production.
·
Per-Unit
Production Cost = [Total Input Cost] / [Total Output]
Determinants of SRAS
·
Input Prices:
o
Domestic Resource Prices
§ Wages
(75% of all business costs)
§ Cost
of Capital
§ Raw
Materials (Commodity prices)
o
Foreign Resources Prices
o
Market Power
o
Increase
in Resource Prices = SRAS Shifts Left
o
Decrease
in Resource Prices = SRAS Shifts Right
·
Productivity: [Total Output] / [Total
Input]
o
More
Productivity = Lower Unit Production Cost. [SRAS Shifts Right]
o
Less
Productivity = Higher Unit Production Cost [ SRAS Shifts Left]
·
Legal-Institutional Environment:
o
Taxes & Subsidies
§ Taxes (Money goes to the government)
on business increases per unit production cost = SRAS Shifts Left
§ Subsidies (Money from the government)
to business reduces per unit production cost= SRAS Shifts Right
o
Government Regulation:
§ Government Regulation creates a cost
of compliance = SRAS Shifts Left
§ Deregulation reduces compliance costs
= SRAS Shifts Right
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