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Macroeconomic Models II
Aggregate Supply and the Short-run Aggregate Supply (SRAS) Curve
How can we combine our understanding of AD with AS to
determine Macroeconomic Equilibrium?
Is there more than one way to view the AS curve? What
impact would that make on public policy?
IB Syllabus: Aggregate Supply
What is Aggregate Supply (AS)?
Describe the term aggregate supply
Explain, using a diagram, why the short-run aggregate supply curve (SRAS curve)
is upward sloping
Explain, using a diagram, how the AS curve in the short run (SRAS) can shift due
to factors including changes in resource prices, changes in business taxes and
subsidies and supply shocks
Alternate Views of AS
Explain, using a diagram, that the monetarist/new classical model of the longrun aggregate supply curve (LRAS) is vertical at the level of potential output (full
employment output) because aggregate supply in the long run is independent of
the price level
Explain, using a diagram, that the Keynesian model of the aggregate supply curve
has three sections because of “wage/price” downward inflexibility and different
levels of spare capacity in the economy
Shifts in the AS curve
Explain, using the two models above, how factors leading to changes in the
quantity and/or quality of factors of production (including improvements in
efficiency, new technology, reductions in unemployment, and institutional changes)
can shift the aggregate supply curve over the long term
Aggregate Supply
• Aggregate Supply: The total quantity of all final goods and services
that are expected to be produced in an economy at different price
levels, ceteris paribus
• Short-run Aggregate Supply Curve: The relationship between the
Price Level and the quantity of Real GDP produced by firms when
resource prices do not change (more on this in a minute)
• For AS, the relationship between Price Level and Real GDP is
_____________________
• Question: Why is it upward sloping?
What’s so Special About Wages?
• Usually the largest part of a firm’s cost of production
• Tend to be rigid in the short term
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Labor contracts/labor pressure
Minimum wage legislation
Firm desire to avoid negative morale
Fairness issues
Aggregate Supply Curves
Need to differentiate between the Short Run and the Long Run
(different definition than we learned in Theory of the Firm):
• Short-run Aggregate Supply (SRAS) curve: The relationship
between the ___________ and the quantity of ___________
produced by firms when resource prices (particularly wages) do
not change. In the short run, wages are ____________
• Long-run Aggregate Supply (LRAS) curve: The relationship
between the ___________ and the quantity of ___________
produced by firms when wages and other resource prices change
to fully reflect any changes in the price level. In the long run,
wages change in response to changes in the ______________
A Basic SRAS Curve
Changes in AS – Shifts in the Curve
• Changes/Shifts ≠ Movements along the AS curve
• Movements: Caused by changes in the price level
• Shifts: Outward/rightward when AS increases; inward/leftward
when AS decreases
Changes in AS
• Changes in Wages
• Changes in non-labor resource prices
• Changes in business taxes
• Changes in subsidies offered to businesses
• Supply shocks