Aggregate supply

Aggregate supply
-the level of real GDP that firms will produce at each price level

Long Run vs. Short Run
Long Run: period of time where input prices are completely flexible and adjust to the changes in the price level.

• In the long run the level of real GDP supplied  is independent of the price level.

Short Run: 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 real GDP supplied is directly related to the price level
•  LRAS- vertical at full employment

Change in short run aggregated supply

• increase in SRAS (shift to the right -->)
• decrease in SRAS ( shifts to the left <--)
•  the key to understanding shifts in the SRAS is per unit cost of production : total input cost /total output

Determinates of SRAS

1. input prices

• increase in resources : Shift to the left (<--)
• decreases in resources: shift to the right (-->)

Domestic resource prices

-wages( 75% of all business)

-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 resource control the price of theses resource.

•  increase in resource prices : SRAS (<--)
• decrease in resource prices: SRAS (-->) 

2. Productivity

-total output/total input

• more productivity= lower unit production (SRAS -->)
• less productivity=higher unit production cost ( SRAS<--)

3.legal-institutional environment

  -Taxes and subsides

• taxes- money to government on businesses increase per unit production cost = SRAS (<--)
• subsides ( money from the government) reduces per unit cost of production=SRAS (-->)

     - Government regulations

• creates a cost of compliance = SRAS (<--)
• deregulation reduces compliance cost= SRAS (-->)