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

Aggregate Supply

Unit 3 Chapter 11


Definition

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

Possible Shapes of Aggregate Short Run Supply Curve

  • Horizontal SRAS Curve

PL

SRAS

GDPr


Horizontal

Horizontal

  • Conditions:

  • Substantial unemployment and excess capacity

  • Might be in a recession or depression


Upward sloping or intermediate range sras curve

Upward sloping or Intermediate Range SRAS Curve

PL

SRAS

GDPr


Upward sloping or intermediate range

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

Vertical Range SRAS Curve

PL

SRAS

GDPr


Vertical range sras curve1

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

Aggregate Range

SRAS

PL

A = horizontal

B = upward sloping

C = vertical

C

B

A

GDPr


Determinants of as

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

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

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

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 nc1

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. 


Aggregate supply

  • 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

Long Run Aggregate Supply

LRAS

PL

Output or GDPr


Aggregate supply

  • 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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