Aggregate Supply
The level of real GDP (GDP r) that firms will produce at each price level (PL).
Long run vs. Short run
Long-run: is the period of time where input prices are completely flexible and adjust to changes in the price level.
- in the long-run, the level of real GDP supplied is independent at the price-level.
Short-run: is the period of time where 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
Long Run Aggregate Supply (LRAS)
- LRAS marks the level of full employment in 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.
- This means that the LRAS is vertical to the economy's level of full employment.
- Full employment: FE/YF/ Y*
Changes in SRAS
- an increase in SRAS is seen as a shift to the right SRAS ->
- a decrease in SRAS is seen as a shift to the left SRAS <-
- Per unit cost of production = Total input cost divided by total output
Determinants of SRAS
- Input prices
- Legal Institutional Environment
- Productivity
(1.)Input Prices
• domestic resource prices
- wages (75 percent of all business costs)
- cost of capital (expenses)
- raw materials (commodity prices)
foreign resource prices
market power
- increase in resources prices = SRAS <-
- decrease in resources prices = SRAS ->
(2)Productivity
Productivity = total output divided by total input
• more productivity = lower unit production cost = SRAS ->
• lower productivity = higher unit production cost = SRAS <-
(3)Legal Insitutional Environemt
• Taxes ($ to government) on business increase per unit production cost = SRAS <-
• Subsidies ($ from government) to business reduce per unit production cost = SRAS ->
Government Regulation
- government regulation creates a cost of compliances = SRAS <-
- deregulation reduced compliances cost = SRAS ->
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