Download DEVIRING THE AGGREGATE SUPPLY CURVES

DEVIRING THE
AGGREGATE SUPPLY
CURVES
29
CHAPTER
Objectives
After studying this chapter, you will able to
ƒ Derive the long-run aggregate supply curve
ƒ Derive the short-run aggregate supply curve
ƒ Explain the links between the production function and
the aggregate supply curves
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate
Supply Curve
Figure A29.1(a) shows the
labour market.
Labour market equilibrium
(full-employment
equilibrium) occurs at a
real wage rate of $35 an
hour with 20 billion hours
of labour employed.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate
Supply Curve
Figure A29.1(b) shows the
production function.
At full-employment
equilibrium, with 20 billion
hours of labour employed,
real GDP is $1,000 billion.
Potential GDP is $1,000
billion.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
1
Deriving the Long-Run Aggregate
Supply Curve
Figure A29.1(c) derives
the long-run aggregate
supply curve.
If the price level is 100 and
the money wage rate is
$35, the real wage rate is
also $35.
At this real wage rate,
there is full employment
and real GDP is $1,000
billion at point J.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate
Supply Curve
If the price level is 120 and
the money wage rate is
$42, the real wage rate is
still $35.
Again there is full
employment and real GDP
is $1,000 billion at point I.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate
Supply Curve
If the price level is 80 and
the money wage rate is
$28, the real wage rate is
still $35.
Yet again, there is full
employment and real GDP
is $1,000 billion at point K.
The LAS curve passes
through the points I, J, and
K.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
2
Deriving the Long-Run Aggregate Supply
Curve
Changes in Long-Run Aggregate Supply
Long-run aggregate supply can change for two reasons:
ƒ Change in labour supply
ƒChange in labour productivity
An increase in the population increases the labour force
and increases the supply of labour.
An increased supply of labour brings a fall in the real wage
rate, an increase in employment, and an increase in
potential GDP and long-run aggregate supply.
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
Short-Run Equilibrium in
the Labour Market
Figure A29.2 shows the
labour market in the short
run.
If the price level is 100 and
the money wage rate is
$35, the real wage rate is
also $35 and there is full
employment at point C.
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
If the price level falls to
87.5 but the money wage
rate is fixed at $35, the
real wage rate rises to
$40.
The quantity of labour
demanded decreases to
15 billion hours and there
is unemployment at point
B.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
If the price level rises to
116.7 but the money wage
rate is fixed at $35, the
real wage rate falls to $30.
The quantity of labour
demanded increases to 25
billion hours and there is
above full employment at
point D.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
3
Short-Run Aggregate Supply
Deriving the Short-Run
Aggregate Supply Curve
Figure A29.3(a) shows that
equilibrium in the labour
market depends on the
price level.
As the price level rises
from 87.5 to 100, to 116.7,
employment increases
from 15 billion hours to 20
billion hours and then to 25
billion hours.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
Figure A29.3(b) shows the
real GDP produced at 15
billion hours, 20 billion
hours, and 25 billion hours
of labour.
As the price level rises
from 87.5 to 100, to 116.7,
employment increases
from 15 to 20 to 25 billion
hours and real GDP
increases from $888 to
$1,000 to $1,080 billion.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
Figure A29.3(c) derives
the SAS curve.
As the price level rises
from 87.5 to 100, to 116.7,
the real wage rate falls
from $40 to $35 to $30,
employment increases
from 15 to 20 to 25 billion
hours and real GDP
increases from $888 to
$1,000 to $1,080 billion.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
4
Short-Run Aggregate Supply
Changes in Short-Run Aggregate Supply
Short-run aggregate supply can change for two reasons:
ƒ Change in long-run aggregate supply
ƒChange in money wage rate
© Pearson Education Canada, 2003
Short-Run Aggregate Supply
Short-Run Changes in the Quantity of Real GDP
Supplied
© Pearson Education Canada, 2003
DEVIRING THE
AGGREGATE SUPPLY
CURVES
29
CHAPTER
A change in the price level, all other things remaining the
same, brings a change in the quantity of real GDP
supplied and a movement along the short-run aggregate
supply curve.
The Shape of the Short-Run Aggregate Supply Curve
The SAS curve becomes steeper at higher price levels.
The linear SAS curve is an approximation for small
changes in the price level and real GDP.
© Pearson Education Canada, 2003
THE
END
© Pearson Education Canada, 2003
5