Aggregate Supply: the level of real GDP (GDP r) that firms will produce at each price level (PL)
Long-run v. 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 Aggregate Supply (also known as LRAS)
• the long-run aggregate supply or 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 at the company's level of full employment.
• = Full employment: FE, YF, or white astrid mark
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, shift in SRAS is per unit cost of production.
- per unit cost of production = total cost divided by total output
Determinants of SRAS
(Remember: all of the following affect unit product cost)
-Input price, Productivity, & Legal Insitutional Enviornment
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 ->
Productivity
Productivity = total output divided by total input
• more productivity = lower unit production cost = SRAS ->
• lower productivity = higher unit production cost = SRAS <-
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 ->
Full Employment: equilibrium exists where AD intersects SRAS & LRAS same point
Recessionary Gap
• a recessionary gap exists when equilibrium occurs below full employment product.
Inflationary Gap
• an inflationary gap exists when equilibrium occurs beyond full employment output.
Nominal Wages v. Real Wages (& Sticky Wages)
Nominal wages: the amount of money reviews by a worker per unit of time. (Hour, day)
Real wages: the amount of goods and services a worker can purchase with their nominal wage... (Purchasing power of your nominal wage)
Sticky wages: nominal wage level, that is set according to an initial price level. ( does not vary due to labor contacts and other restrictions)
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