Aggregate Supply

Aggregate Supply

AS- Only shift can be caused by determinants level of GDP that firms will reduce at each price level (PL)

Long Run V Short Run

Long run - vertical

Period of time where input/resource prices are completely flexible, adjust to changes in PL

Level of GDP supplied is independent of PL

Short run

Period of time where input prices are sticky/ don't adjust to PL

In short run the level of GDP has a direct relationship with PL
AD is downward slopping
AS is upward slopping

Long run aggregate supply (LRAS)

LRAS full employment in economy ( analogous to PL ) 

full employment = YF, Y*, FE

Short run aggregate supply (SRAS)

Sticky input prices = SRAS is upward slope

Changes in SRAS

Increase ( to the RIGHT )
Decrease ( to the LEFT ) 

Determinants of SRAS

All of the following affect unit prod. cost:

Input prices

Productivity 

Legal institutional environment - tax subsidies and government regulations

Input prices

Domestic resource prices

wages ( 75% of business cost )

cost of capital ( start up )

raw materials ( commodity prices )

Foreign resources prices

dollar strength - if weak $: high foreign resources

if strong $: low foreign resources

Market power

monopolies, carters control resources

control the price of those resources 

ex: Walmart has no competition - only competitor is amazon

Increase in resource prices = SRAS to the LEFT 

Decrease in resource prices = SRAS to the RIGHT

Productivity 

Productivity = total output / total input

more productivity = lower unit production cost = SRAS to the RIGHT

lower productivity = higher unit production cost = SRAS to the LEFT