Aggregate supply
Long run v short run
Long run- 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 from price level
Short run- period of time where input prices changes are
sticky and do not adjust to changes in price level: the level of real GDP
supplied is directly related to the price level
Long Run Aggregate Supply (LRAS) - marks the level of full
employment in the economy (analogous to PPC)
Because input
prices are completely flexible in the long-run, change in price level do not
change firm’s real profits and therefore do not change firm’s level of output.
This means LRAS is vertical at economy’s level of full employment.
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SRAS- because input prices are sticky in the short run the
SRAS is upward sloping.
Changes in SRAS- increase is shift to right, decrease is
shift to left, key to understanding is per unit cost of production
Per- unit production cost= total input cost / total output
Determinants of SRAS:
Input
prices:
Domestic
resource prices: wages (75% of business cost), cost of capital, raw materials
Foreign
resource prices: Strong $= lower foreign resource prices
Market
Power: monopolies and cartel that control resources control the price of those
resources
Increase
resource prices= SRAS shift to left
Decrease
resource prices= SRAS shift to right
Productivity:
Productivity=
total output / total input
More
productivity= lower unit production cost= SRAS right
Lower
productivity= higher unit production cost= SRAS left
Legal
institutional environment:
Taxes
and subsidies
Taxes
($ to Gov’t) increase per unit price= SRAS left
Subsidies
($ from Gov’t) decrease per unit price= SRAS right
Government
Regulation
Government
regulation creates a cost of compliance= SRAS left
Deregulation
reduces compliance costs = SRAS right
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