Aggregate supply
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Aggregate Supply. Unit 3 Chapter 11. Definition. AS is a schedule showing level of real domestic output available at each possible price level. Possible Shapes of Aggregate Short Run Supply Curve. Horizontal SRAS Curve. PL. SRAS. GDPr. Horizontal. Conditions:

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Aggregate Supply

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Aggregate Supply

Unit 3 Chapter 11


Definition

  • AS is a schedule showing level of real domestic output available at each possible price level.


Possible Shapes of Aggregate Short Run Supply Curve

  • Horizontal SRAS Curve

PL

SRAS

GDPr


Horizontal

  • Conditions:

  • Substantial unemployment and excess capacity

  • Might be in a recession or depression


Upward sloping or Intermediate Range SRAS Curve

PL

SRAS

GDPr


Upward sloping or Intermediate Range

  • Conditions:

  • Closer to full-employment levels

  • Upward pressure on prices is caused by rising costs of doing business


Vertical Range SRAS Curve

PL

SRAS

GDPr


Vertical Range SRAS Curve

  • Conditions:

  • Absolute capacity is assumed—the economy is unable to produce any more G & S for a long period of time

  • Any attempt to increase output will bid up resource and product prices

  • Full employment is assumed


Aggregate Range

SRAS

PL

A = horizontal

B = upward sloping

C = vertical

C

B

A

GDPr


Determinants of AS

  • 1. Change in input prices:

    • Availability of resources (4 factors)

    • Prices of imported resources

    • Market power of certain industries

    • This was also in the eeb book

    • This is the most common determinant


Determinants of AS cont.

  • 2. Change in productivity can cause changes in per-unit production cost

    • Productivity rises, unit production costs will 

      • Shift to the right and lower prices

    • Productivity falls, unit production cost will 

      • Shift to the left and increase prices


Determinates of AS cont.

  • 3. Change in legal-institutional environment:

    • Business taxes and or subsidies

    • Cost of gov’t regulation (pollution clean up)


Change in SRAS?   or NC

  • 1. unions grow more aggressive; wage rates increase

  • 2. labor productivity increases dramatically

  • 3. OPEC successfully increases oil prices

  • 4. computer technology brings new efficiency to industry

  • 5. Gov’t spending increases

  • 6. giant natural gas discovery decreases energy prices

  • 7. cuts in tax rates increase incentives to save

  • 8. low birth rate will decrease the labor force in the future.


Change in SRAS?   or NC

  • 1. unions grow more aggressive; wage rates increase

    •  or shift to the left

  • 2. labor productivity increases dramatically

    •  or shift to the right

  • 3. OPEC successfully increases oil prices

    •  or shift to the left

    • Always think of oil as an input. Many things are made with oil—don’t think just gas

  • 4. computer technology brings new efficiency to industry

    •  or shift to the right

  • 5. Gov’t spending increases

    • NC—gov’t spending would shift the AD curve. 


  • 6. giant natural gas discovery decreases energy prices

    •  or shift to the right

  • 7. cuts in tax rates increase incentives to save

    • NC— would shift the AD curve

  • 8. low birth rate will decrease the labor force in the future.

    • NC—will not affect aggregate supply for 16 years or more—we graph for TODAY. 

    • Any questions?


Long Run Aggregate Supply

LRAS

PL

Output or GDPr


  • Represents the Q of g & s a nation can produce over a sustained period of time using its productive resources efficiently

  • LRAS is at full employment

  • 4 factors of production will shift the LRAS


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