Download Aggregate Supply

Aggregate Supply
 The quantity of output that firms are willing and able to
produce for the economy
 In the long run, the level of output depends on the capital
stock, the labor force, and the level of technology.
 The long run – a period in which nominal wages (and other
resource prices) match changes in the price level
 In the short run, the level of output depends on the
amount of labor employed with a given level of capital and
technology.
 The short run – a period in which nominal wages (and other
resource prices) do not respond to price-level changes.
Long Run Aggregate Supply
 Aggregate supply – the total supply of all goods and
services in the economy.
 Aggregate supply curve shows the relationship between
total quantity of output supplied by all firms and the
overall price level.
 The Aggregate Supply curve is NOT the sum of
individual firm supply curves
 In Microeconomics, a firm’s supply curve is derived by
changing price and holding all other variables constant,
including costs.

If there is an increase in overall price level, it is unrealistic to
assume that costs are constant for individual firms
Aggregate Supply
 The Aggregate Supply curve is the relationship
between production and the price level; it is
sometimes call a
 Price-Output Adjustment Curve
 The Aggregate Supply Curve, or real GDP, depends on
the quantity of labor, the quantity of capital and the
level of technology
 In the short run, the capital and the level of
technology are fixed.
 Only the quantity of labor changes
Aggregate Supply
 A short-run aggregate supply (SRAS) curve assumes the
money wage, resource prices and potential GDP are
constant.
 With the money wage, resource prices and potential
GDP constant, as the overall price level rises, firms will
produce more output
 The short-run aggregate supply curve can be shaped as a
horizontal line, a vertical line or a positively sloped line.
 We usually draw the aggregate supply curve as positively
sloped.
Aggregate Supply
 The long-run aggregate supply curve is vertical at full
employment or potential GDP.
 If there is an increase in the overall price level that is
matched by equal percentage increases in the money
wage rate and other resource prices, the economy will
remain at potential GDP.
 Following adjustments, the SRAS and Aggregate
Demand curves intersect along the LRAS curve.
Aggregate Supply
 The SRAS will change (a shift in the curve) if the
potential GDP changes, or if money wages or other
resource prices change.
 Changes in potential GDP can occur if there is a change
in the
 full-employment quantity of labor
 A change in the Quantity of capital
 Or a technological advance
 A decrease in money-wage rates shifts the SRAS but not
the LRAS because a change in the money-wage rate is
matched by an equal change in the price level in the
long run.
Shifts in Short-Run Aggregate
Supply
 Examples of shifts in SRAS
 An increase in labor productivity will shift the SRAS to the
right. (productivity is a measure of the relationship between a
nation’s level of real output and the amount of resources used
to produce that output).
 An increase in the average wage rate will shift SRAS to the left.

Decreases in wages reduce per-unit production costs, so the AS curve
shifts to the right
 Input prices (these resources can be either domestic or
imported)
 An increase in technology will shift SRAS to the right
 Legal-Institutional Environment –


changes in taxes and subsidies
change sin the extent of regulation.
Aggregate Supply
 The horizontal portion of the AS curve represents
unused capacity.
 This means that the supply can increase without
increasing the price.
 This can only occur when there is excess capacity in
terms of raw materials or labor
Aggregate Supply
 The mid-range (or positive sloping range) of the AS curve
illustrates a tightening of resource availability and therefore
impacts the price level as more products are demanded.
 This situation occurs when demand for the product
increases and resources needed to produce more products
are becoming scarce, and therefore more costly
 The vertical range of the AS curve represents the situation
where all resources are being used and no more products
can be produced.
 The only thing that can happen is that the suppliers raise
their prices