Download Aggregate Supply and AD

Aggregate Supply: Short – Run & Long – Run
1
Short-run Aggregate Supply
Aggregate Supply (AS) shows the quantity
of real GDP produced at different price
levels.
 Short-run AS slopes upward

a higher price level (holding production costs
and capital constant in the short-run)
 higher profit margins
 firms want to produce more.
–
2
Short – Run
Aggregate
Supply:
Constant
Returns
3
Shape of Short-run AS (SRAS)

In the short-run, the capital stock can’t
change.
–
–
the number of factories and machines is
constant
increasing labor input increases output …
but at a diminishing rate
•

More and more workers are sharing the same
capital stock
Diminishing returns  an ever-steeper
SRAS curve.
4
Short – Run
Aggregate
Supply:
Diminishing
Returns
5
The Shape of Long-run AS (LRAS)

Resource costs are NOT fixed in the long-run.
–

The amount of capital is NOT fixed in the longrun
–

As prices rises, workers demand and get higher wages
Profits don’t rise with price
firms can build new plants and buy new equipment
over the long-run.
AS is set by production possibilities in the longrun
–
–
LRAS is not affected by prices
LRAS is vertical: higher prices cannot elicit more
output in the long-run.
6
Long-Run
Aggregate
Supply:
Potential
Real GDP
7
Determinants of Aggregate Supply
8
Determinants of Aggregate Supply
9
Determinants of Aggregate Supply
10
Shifting the LongRun Aggregate
Supply Curve
Growth occurs
as the labor
force and capital
stock grow and
as technological
innovation
improves
production
efficiency.
11
Changes in
Short-Run
Aggregate
Supply
12
Effects of a
Change in
Aggregate
Supply
Cost-push
inflation:
cost
increases
push AS to
the left
causing
price level
increases
(inflation).
13
Aggregate
Demand Aggregate
Supply
Equilibrium
14
Aggregate
Demand and
Supply
Equilibrium:
Short-run and
long-run
responses to
increase in
aggregate
demand
15
Economic
Insight:
OPEC and
a decrease
in
aggregate
supply
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