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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