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Aggregate Supply -
Aggregate Supply -
- Aggregate Supply
- the level of real GDP that firms will produce at each level
- the determinants are the only things that will cause a shift
- Long-Run of Aggregate Supply (LRAS)
- vertical at full employment \
- 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; stable the entire time
- marks the level of employment, analogous to PPC
- Short-Run Aggregate Supply
- 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 GDP supplied is directly related to the price level
- because input prices are sticky in the short run, the SRAS curve is upward slope
- key to understanding shifts is per unit cost of production
- (Total Input Cost)/(Total Output)
- Determinants of SRAS
- Input Prices
- Domestic Resource Prices
- wages (75% of business costs)
- cost of capital
- raw material (commodity prices)
- Foreign Resource Prices
- strong $ = lower foreign resource prices
- weak $ = higher foreign resource prices
- Market Prices
- monopolies and cartels that control resources also control the price of those resources
- increase in resource prices: SRAS left
- decrease in resource prices: SRAS right
- Productivity
- (Total Output)/(Total Input)
- more productivity - lower unit production cost
- lower productivity - higher unit production cost
- Legal Institution Environment
- taxes and subsidies
- taxes ($ to govt) on business increase per unit cost of production (SRAS left)
- subsidies ($ from government) to business reduce per unit production cost (SRAS right)
- Government Regulation
- creates a cost of compliance = SRAS left
- deregulation reduces compliance costs = SRAS right
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