Unit 3 : Aggregate Supply


  • The level of Real GDP(GDPr) that firms will produce at each price level (PL)
Long run v Short run 
LR - period of time where input prices are completely flexible and adjust to changes in the price level .
  • in the price level of Real GDP supplied is independent of the price level.
Short run - period of time where input prices are sticky and do not adjust to changes in the price level .
  • In the SR the level of Real GDP supplied is directly related to the price level.
Long run aggregate supply (LRAS) 
  • The long-run aggregate supply or LRAS marks the levels of full employment in the economy (analogs 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. This means that the LRAS is vertical at the economy's level of full employment.
Changes in SRAS
  • An increase in SRAS is seen as a shift to the right . SRAS →
  • A decrease in SRAS is seem as a shift to the left SRAS
  • 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 prices
  • productivity 
  • legal-institutional environment 
IP
  • Domestic Resources prices
    • wages 75% company spent 
    • Cost of capital 
    • Raw materials (Commodity prices )
  • Foreign Resource Prices 
    • strong $ = lower foreign resources prices 
    • Weak $= higher foreign resources prices 
  • Market Power 
    • monopolies and cartels that control resources control the price of those resources 
    • increase in resources prices=SRAS ←
    • Decreases in resource prices = SRAS→
P
=  total output/ total inputs 
  • more productivity = lower unit production cost= SRAS→
  • Lower productivity = higher unit production cost = SRAS←
LTE
  • Taxes and subsides 
  • Taxes ($ to gov't ) on business increase per unit production cost = SRAS ←
  • Subsides ($ from gov't ) to business per unit production cost = SRAS →
  • Government Regulation 
    • government regulation creates a cost of compliance=SRAS
    • ←
    • Deregulation reduces compliance costs =SRAS→
Image result for lras curve










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