Aggregate Supply Notes

•The level of real GDP that firms will produce at each price level.

•REAL GDP is measuring what output is. 

•Long run: a period of time where input prices are completely flexible and adjust to 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 the 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. 

•Long run aggregate supply (LRAS)

•The long run aggregate supply marks the level of full employment in the economy (analogous to ppc)

•Because the input prices are completely flexible in the long run, changes in price level do not change firms real profits and therefore do not change firms level of output. This means that LRAS is vertical at the economies level of full employment. 

•Short Run Aggregate Supply 

•Because input prices are sticky in the short run, the SRAS is upward sloping. 

•Changes in SRAS

• An increase in SRAS is seen as a shift to the right. 

•A decrease in SRAS is seen as a shift to the left. 

•The key to understanding shifts in SRAS is per unit cost of production 

•Per unit cost= Total output cost/total input

•Per  

•Determinants of SRAS (all affect unit production cost)

-input prices

-productivity 

-legal institutional environment 

•Input Prices

Domestic resource prices 

-wages (75% of all business costs) 

-cost of capital 

-raw materials (commodity prices)

Foreign resource prices

-Strong $; lower foreign resources prices

-Weak $: higher foreign resource prices 

Marker power 

-Monopolies and cartels that control resources control the price of those resources 

•Increases in Resource Prices= SRAS<

•Decreases in Resource Prices= SRAS➡️

Productivity 

•Productivity= total output/total inputs

•More productivity= lower unit production cost= SRAS➡️

•Lower Productivity= higher unit production cost= SRAS<

Legal institution environment

Taxes and subsidies 

-taxes ( $ to government on business increase per unit production cost = SRAS<

-Subsidies ($ to government) to business reduce per unit production cost = SRAS➡️

Government regulation

-Government regulation creates a cost of compliance= SRAS <

-Deregulation reduces compliance costs= SRAS ➡️