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• Aggregate Supply
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Macroeconomics - Aggregate demand–aggregate supply
The AD-AS model has become the
standard textbook model for
explaining the macroeconomy. This
model shows the price level and level
of real output given the equilibrium in
aggregate demand and aggregate
supply. The aggregate demand curve's
downward slope means that more
output is demanded at lower price
levels.
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Macroeconomics - Aggregate demand–aggregate supply
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In the conventional Keynesian use of
the AS-AD model, the aggregate supply
curve is horizontal at low levels of
output and becomes inelastic near the
point of potential output, which
corresponds with full employment.
Since the economy cannot produce
beyond more than potential output, any
AD expansion will lead to higher price
levels instead of higher output.
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Aggregate demand - Aggregate demand-aggregate supply model
Carefully using ideas from the theory of
supply and demand, aggregate supply can
help determine the extent to which increases
in aggregate demand lead to increases in
real output (economics)|output or instead to
increases in prices (inflation). In the diagram,
an increase in any of the components of 'AD'
(at any given 'P') shifts the 'AD' curve to the
right. This increases both the level of real
production ('Y') and the average price level
('P').
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Aggregate supply
In economics, 'aggregate supply' is the
total supply of goods and services that
firms in a national economy plan on selling
during a specific time period. It is the total
amount of goods and services that firms
are willing to sell at a given price level in
an economy.
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Aggregate supply - Analysis
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*aggregate supply is usually
inadequate to supply ample
opportunity
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Aggregate supply - Different scopes
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# Short run aggregate supply — During
the short-run, firms possess one fixed
factor of production (usually capital). This
does not however prevent outward shifts
in the SRAS curve, which will result in
increased output/real GDP at a given
price. Therefore, a positive correlation
between price level and output is shown
by the SRAS curve.
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Aggregate supply - Different scopes
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# Long run aggregate supply (LRAS) — Over
the long run, only capital, labour, and
technology affect the LRAS in the
macroeconomic model because at this point
everything in the economy is assumed to be
used optimally. In most situations, the LRAS
is viewed as static because it shifts the
slowest of the three. The LRAS is shown as
perfectly vertical, reflecting economists' belief
that changes in aggregate demand (AD) have
an only temporary change on the economy's
total output.
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Aggregate supply - Different scopes
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When graphing an aggregate supply
and demand model, the MRAS is
generally graphed after aggregate
demand (AD), SRAS, and LRAS have
been graphed, and then placed so that
the equilibria occur at the same point
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Aggregate supply - Different scopes
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In a standard aggregate supply demand
model, the output (Y) is the x axis and
price (P) is the y axis. An increase in
aggregate demand shifts the AD curve
rightward, bringing the equilibrium
point horizontally along the SRAS until
it reaches the new AD. This point is the
short run equilibrium.
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Aggregate expenditure - Aggregate Expenditure and Aggregate Supply
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In an under-employment equilibrium
the Keynesian Cross refers to the
point of intersection of the Aggregate
Supply and the Aggregate Expenditure
curve
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Lucas aggregate supply function
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The 'Lucas aggregate supply function' or
'Lucas 'surprise' supply function', based on
the 'Lucas imperfect information model', is
a representation of aggregate supply
based on the work of New classical
macroeconomics|new classical economist
Robert Lucas, Jr.|Robert Lucas
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Lucas aggregate supply function - Background
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New classical made its first attempt to
model aggregate supply in Lucas and
Leonard Rapping (1969).Snowdon and
Vane (2005), 233
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Lucas aggregate supply function - Theory
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The simple version models aggregate output
as a function of the price surprise. A more
complicated expression of the Lucas supply
curve adds expectations to the model.
Aggregate supply is a function of the natural
level of output(Y_) and the difference
between actual prices (P_t) and the expected
price level given past information \Omega_
times a coefficient based on an economy's
sensitivity to price surprises
(\alpha):Snowdon and Vane (2005), 234.
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Markup (business) - Aggregate supply framework
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:Sub the wage setting into the price setting to
get the aggregate supply curve.
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Markup (business) - Aggregate supply framework
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P = Pe(1+μ) F(u,z). This is the aggregate
supply curve. Where the price is
determined by expected price,
unemployment and z the catch all variable.
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AD-AS model - Aggregate supply curve
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The aggregate supply curve may reflect
either labor market disequilibrium or labor
market equilibrium. In either case, it shows
how much output is supplied by firms at
various potential price levels. The
aggregate supply curve (AS curve)
describes for each given price level, the
quantity of output the firms plan to supply.
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AD-AS model - Aggregate supply curve
However, the Keynesian aggregate
supply curve also contains a normally
upward-sloping region where
aggregate supply responds
accordingly to changes in price level
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AD-AS model - Aggregate supply curve
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Factor prices increase if producing at a
point beyond full employment output,
shifting the short-run aggregate supply
inwards so equilibrium occurs somewhere
along full employment output
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AD-AS model - Shifts in aggregate supply curves
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The Keynesian model, in which there is no
long-run aggregate supply curve and the
classical model, in the case of the shortrun aggregate supply curve, are affected
by the same determinants
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AD-AS model - Shifts in aggregate supply curves
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The long-run aggregate supply curve
of the classical model is affected by
events that affect the potential output
of the economy. Factors revolve
around changes in the quality and
quantity of factors of production.
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AD-AS model - Shifts of aggregate demand and aggregate supply
The following summarizes the
exogenous events that could shift the
aggregate supply or aggregate demand
curve to the right. Exogenous events
happening in the opposite direction
would shift the relevant curve in the
opposite direction.
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AD-AS model - Shifts of aggregate supply
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The following exogenous events would
shift the short-run aggregate supply curve
to the right. As a result, the price level
would drop and real GDP would increase.
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AD-AS model - Shifts of aggregate supply
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The following events would shift the long-run
aggregate supply curve to the right:
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