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UNIT 3: Aggregate Supply (AS)

*The level of Real GDP (GDPr) that firms will produce at each Price Level (PL)
*Long run (LRAS) - Period of time where input prices are completely flexible and adjust to changes in the price-level
-The level of Real GDP supplied is independent of the PL
-Vertical and usually stationary
*Short run- input prices are sticky and do not adjust to changes in PL
-the level of real GDP supplied is directly related to the PL

LRAS
-marks the level of full employment in the economy (analogous to PPC)
SRAS
-b/c input prices are sticky in the short-run, the SRAS is upward sloping
>>Changes in SRAS-an increase in SRAS = shift to the right | SRAS  →
-A decrease in SRAS = shift to the left| SRAS ←
*The key to understanding shifts in SRAS is per unit cost of Prod.
*Per unit cost of prod. = total input cost/total output cost
>>Determinants (affect unit prod. cost)
*Input prices
Domestic resource prices
-wages (75% of all business costs)
-cost of capital
-raw materials (commodity prices)
Foreign Resource Prices
-Strong $ = lower foreign resource prices
-Weak $ = higher foreign resource prices
Market Power
-monopolies and cartels that control resources control the price of those resources
-increases in RP = SRAS ←
-decreases in RP = SRAS →
*Productivity
- total output/total input
-More productivity = lower unit production cost = SRAS →
- lower productivity = higher
*Legal-Institutional Environment
Taxes and Subsidies
-Taxes ($ to gov't) on business increase per unit prod. cost = SRAS ←
-Subsidies ($ from gov't) to business reduce per unit prod. cost = SRAS →
Government Regulation
-gov't regulation creates a cost compliance = SRAS ←
-deregulation reduces compliance costs = SRAS →

3 Ranges of AS
Horizontal or Keynesian: unemployed resources which results in a recession or depression. Includes only levels of real output that are < full employment level.
Intermediate: resources are getting closer to the full employment level, which creates upward pressure on wages and prices
Vertical/Classical: Real GDP is at  level w/ unemployment at the full employment level and when there is any increase in demand, will result only in an increase in price.
The economy is unable to produce anymore goods/services for a sustainable period of time.





Comments

  1. UnknownApril 5, 2018 at 9:58 PM

    Your notes are very detailed. You specify everything clearly and it is easy to understand all the key points. However, be sure to elaborate on the components of AS. Add more examples too.

    ReplyDelete

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