- Aggregate Supply
- Level of real GDP that firms will produce at each level.
- Long-run
- Period of time were 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)
- Analogous to PPC
- Marks level of full employment in the economy
- Short Run Aggregate Supply (SRAS)
- Because input prices are sticky in the short-run, the SRAS
- Changes in SRAS
- An increase in SRAS is seen as a shift to the right
- A decree in SRAS is seen as a shift to the left
- The key to understanding shifts in the 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
- Input Prices
- Domestic Input Prices
- Wages (75% of all business costs)
- Cost of capital
- Raw materials (Commodity prices)
- Foreign Input Prices
- String $ = Lower foreign resource prices
- Weak $ = Higher foreign resource prices
- Market Power
- Monopolies & cartels that control resources control the price of those resources
- Increase in Resource Prices = SRAR shift left
- Decrease in Resource Prices = SRAS shift right
- Productivity
- Total Output / Total Input
- More productivity = Lower unit production cost
- SRAS shift right
- More productivity = Higher unit of production cost
- SRAS shift right
- Legal Institutional Environment
- Taxes & Subsidies
- Taxes ($ to gov't) on business increase per unit production cost = SRAS shift left
- Subsidies ($ from gov't) to business price per unit of production cost = SRAS shift right
- Government Regulation
- Government regulation creates a cost of compliance = SRAS shift left
- Deregulation reduces compliance costs = SRAS shift right
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