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
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
- Because input prices are sticky in the shrt 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.
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
Domestic Resource Prices
- - wages (75% of all business cost)
- - cost of capital
- -raw material (commodity prices)
- -Strong $ = lower foreign resources prices
- - weak $ = higher foreign resources pries
- -Monopoly and cartels that control resources
- Increases in resource prices in= SRAS <-
- Decreases in resource prices= SRAS ->
productivity = total out put/ total input
- more productivity= lower unit production cost = SRAS ->
- lower productivity = higher unit production cost= SRAS <-
- Taxes ($ to gov't) on business increase per unit production cost = SRAS <-
- Subsides ($ form gov't) to business reduce per unit productivity cost = SRAS ->
- - government regulation creates a cost of compliance = SRAS <-
- - deregulation reduces compliance cost- SRAS->
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