Download Production Possibilities Curve

Aggregate Supply
Short-Run Aggregate Supply and Long-Run Aggregate Supply
Short-Run Aggregate Supply Curve:
Slope
SRAS
1
Aggregate
Price Level
14.0
A rise in the
aggregate
price level…
…causes
aggregate output
supplied to rise in
the short run.
Why?
6.0
Y1
Output
The short-run aggregate supply curve, SRAS, is
upward sloping. Why? (Think of wages).
Y2
Real GDP
The Upward Slope of the Short-run Aggregate
Supply Curve
• The “stickiness” of input prices—particularly labor
• Scenario 1: Demand is strong, products are selling like hotcakes (output is up), prices
are up and so is profit per unit.
• But wages don’t increase immediately, as some contracted workers’ wages are fixed for now.
• EVENTUALLY, competition for workers becomes so fierce
that wages are increase.
• But note—output and prices changed QUICKLY, but wages
took longer to catch up.
• Scenario 2: Demand is weak, products won’t sell
output is down), prices are down and so is profit per
unit.
• But wages don’t decrease immediately, because some
contracted workers’ wages are fixed for the time being.
• EVENTUALLY the labor market is so weak that wages fall.
• Note—the prices and output fell quickly, but wagers were
slower to catch up.
Short-Run Aggregate Supply Curve: Shifts
in the Curve
SRAS SRAS SRAS
3
1
2
Aggregate
Price Level
Left shift of the
aggregate supply
curve =
decrease in supply
Right shift of the
aggregate supply
curve =
increase in supply
The short-run aggregate supply curve is upward sloping.
• What causes shifts in the short-run aggregate supply curve?
• How do those causes affect the curve (left or right shift)?
Real GDP
Shifters of the SRAS Curve
Long-Run Aggregate Supply Curve:
Slope
LRAS
Aggregate
Price Level
14.0
…leaves the quantity of aggregate
output supplied unchanged in the
long run. Why?
A rise in the
aggregate
price level…
6.0
The long-run aggregate supply curve, LRAS, is
vertical. Why? (Think about wages again, over
time).
YP
Potential output
Real GDP
Leftward Shift of Short-Run Aggregate
Supply Curve LRAS
SRAS
SRAS
2
Aggregate
Price Level
P1
Suppose that
aggregate
prices
(including
wages) are
relatively low.
1
…but over time, low
unemployment from this
increased production
drives up nominal wages,
which shifts SRAS to the
left.
A1
YP Y1
Initially, low wages have
suppliers ramping up
production above
potential output…
Real GDP
• In the long run, the
economy’s actual
aggregate output
matches potential
aggregate output.
Aggregate
Price Level
Suppose that
aggregate
prices
(including
wages) are
relatively high.
P1
Rightward Shift of Short-Run Aggregate
Supply CurveLRAS
SRAS
SRAS
…but over time, high
unemployment from this
decreased production
drives down nominal
wages, which shifts SRAS
to the right.
A1
1
2
Initially, high wages have
suppliers keeping
production below
potential output…
Y1 YP
Real GDP
• In the long run, the
economy’s actual
aggregate output
matches potential
aggregate output.
How is Aggregate Supply (AS) affected?
a. Brief (5 words) description of the scenario
b. Movement along the curve OR shift in the curve (direction?)
c. Provide a graph to illustrate, and CATEGORIZE THE SHIFT (if there is one)
1. Hackers from a foreign country disable most corporate computing systems. This
disruption continues off and on for several months.
2. The price of grain, a key commodity, skyrockets as the nation switches to more
biofuels as sources of energy.
3. The First Lady’s goal of doubling the fraction of high school seniors that graduate
from college is successful.
4. Due to a weak economy, the consumer price index falls for several consecutive
months.
5. Labor unions are successful in organizing members throughout the country and
they negotiate higher wages and benefits.