Aggregate supply

Aggregate supply

• the level of real GDP (GDP R) that firms will produce at each price level(PL)

Long-run: 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 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 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 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. This means that the LRAS is vertical at the economy's level of full employment.

- Short run aggregate supply(SRAS) 

• because input prices are sticky in the short run, the SRAS is upward sloping.

- 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<-

• 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( all of the following affect unit of production)

•input prices

•productivity

• legal-institutional environment

-Input prices

• domestic resources prices

~ wages (75% of all business costs)

~ cost of capital

~ raw materials(commodity prices)

• Foreign resources prices

~ strong$ = lower foreign resource prices

~ weak$= higher foreign resources prices

•market power

~monopolies and cartels that control resources control the price of those resources

• increase in resource prices= SRAS <-

•decrease in resource prices= SRAS->

-Productivity

• productivity= total output/ total inputs

• more productivity = lower unit production cost=SRAS->

•lower productivity = higher unit production cost=SRAS<-

- Legal-Institutional Environment

• taxes and Subsidies

~ taxes ($ to gov't) on business increase per unit production cost= SRAS<-

~ subsidies($ from gov't) to business reduce per unit production cost= SRAS->

• Government regulation

~ government regulation creates a cost of compliance=SRAS<-

~ Deregulation reduces compliance costs= SRAS->