Unit III Aggregate Supply

Unit III Aggregate Supply

-The level of real  GDP (GDPr)that firms will produce at each price level (PL)

• Long Run vs. Short Run 

-Long Run: Period of time where input prices are completely flexible and adjust to changes in the price level

-Short Run: Period of time where input prices are sticky and don't adjust to change in the price - level

-Long run Aggregate Supply (LRAS):

- the LRAS marks level of fall employment in  the economy (analogous to PPC)

-B/C input prices are completely flexible in the long-run, change in price-level don't change firm's real profits and thus do not change firms level of output

   -Means LRAS is vertical vertical at economies level of full employment 

• Change in SRAS:

-An increase in SRAS it will shift right

-An decrease in SRAS it will shift left

-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 production) 

-input prices

-productivity

-legal-instituational environment  

• Input prices :

-Domestic resource prices:

-wages ( 75% of all business costs)

-cost of capital

-raw materials (Commodity Prices)

• Foreign Resource Prices:
• Market Power

-increase in resource prices = SRAS shift left

-decreases in resources prices = SRAS shift right  

• Productivity:

-total output /total input 

-more productivity = lower unit production cost = SRAS shift right  

-lower productivity = higher unit production cost = SRAS shift left

• Legal- Institutional: 

-Taxes and subsidies:

-taxes ($ to gov) on business increases per unit production cost = SRAS shifts right

-Subsidies ($ from gov) to business reduce per unit production cost = SRAS shifts right 

• Government regulation: 

-Government regulates creates a cost of compliance = SRAS shifts left

-Regulation reduces compliance costs = SRAS right 

•  Full employment:

-equilibrium exists where AD intersects SRAS & LRAS at the same point