1 / 19

SRAS (Keynesian AS)

SRAS (Keynesian AS). By: Haodi Zhang. Definition. “The total amount of goods and services that all the firms in a ll the industries in a country will produce at every price level in a given period of time. “ Economics Textbook p. 274. SRAS. SRAS. Average Price Level. Inelastic Area. P 2.

washi
Download Presentation

SRAS (Keynesian AS)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. SRAS (Keynesian AS) By: Haodi Zhang

  2. Definition • “The total amount of goods and services that all the firms in all the industries in a country will produce at every price level in a given period of time. “ • Economics Textbook p. 274

  3. SRAS SRAS Average Price Level Inelastic Area P2 Maynard Keynes P1 Early 20th-century economist Elastic Area Y1 Y2 Real GDP

  4. SRAS Below Full-Employment SRAS • Full employment-level of output • Very low unemployment • Stable price (low inflation) • Resources are generally being used efficiently and near their full capacity LRAS Average Price Level PE AD1 YFE Real GDP

  5. SRAS Below Full-Employment • Decrease in AD • Fall in price level and output (real GDP) • Equilibrium falls • Workers are laid off • Small decrease in price level leads to a large decrease in output SRAS LRAS Average Price Level PE P1 AD1 AD2 Y1 YFE Real GDP

  6. SRAS Below Full-Employment • Further decrease in AD • Further fall in price level and output (real GDP) • Equilibrium falls • More workers are laid off • The decline in output is proportionally larger than the decline in price level, due to the high elasticity under full-employment level SRAS LRAS Average Price Level PE P1 P2 AD3 AD1 AD2 Y1 YFE Y2 Real GDP

  7. Why are workers laid off? • Firms must lower the price due to fall in demand • Wages and prices are inflexible in the short run, therefore, wage cannot be reduced • “Fixed-wage period” • Labor market rigidities protect workers from low wages

  8. Labor Market Rigidities • Government regulations • Minimum wage laws • Wage agreement with labor unions • Workers contract

  9. SRAS Beyond Full-Employment • AD rises • Small increase in output and increase in average price level (inflation) • Production beyond full employment level SRAS LRAS Average Price Level P2 P1 PE AD3 AD2 AD1 Y1 YFE Y2 Real GDP

  10. How is production beyond full-employment possible? • Full-employment does not mean zero unemployment • There are still workers who are willing and able to work but are employed • It is when the unemployment is low and stable • Nearly all the land, capital and labor are engaged in production of goods

  11. What happens to workers? • More workers are employed in response to the high demand • Unemployment falls • Workers becomes scarce so output increases at a decreasing rate Job Contract

  12. Cause of Increase in SRAS

  13. Right-Ward Shift of SRAS • Increase in output and decrease in price • Increase in employment • Becomes more efficient in production SRAS1 LRAS SRAS2 Average Price Level PE P1 AD1 Y1 YFE Real GDP

  14. Causes of Decrease in SRAS

  15. Left-Ward Shift of SRAS SRAS1 LRAS • Decrease in output and increase in price • Decrease in employment • Lead to inflation and decline in real GDP SRAS2 Average Price Level P1 PE AD1 Y1 YFE Real GDP

  16. Real World Example • Japan does not lay off workers but rather decreases their wages • Therefore, full capacity is never met because of the lack of efficiency • When the AD decreases, the SRAS does not adjust to the full capacity • There is a simple decrease in price and real GDP

  17. http://www.bbc.co.uk/news/business-21136866

  18. Japan’s SRAS (export) SRAS1 LRAS1 • Japan does not lay off workers but rather decreases their wages • Therefore, full capacity is never met because of the lack of efficiency • When the AD decreases, the SRAS does not adjust to the full capacity • There is a decrease in price and increase in real GDP LRAS1 SRAS2 Average Price Level P1 P2 AD1 Y2 Y1 Real GDP

  19. Conclusion SRAS LRAS • The total amount of goods a country will produce at every price level in a given period of time. • There is a elastic and inelastic zone • LRAS indicated full-employment Average Price Level PE AD1 YFE Real GDP

More Related