Aggregate supply - The level of real GDP that firms will produce at each level. (PL)
Long run Vs. Short run.
Long:
- Period of time where input prices are completely flexible and adjust to change in price level.
- Level of GDP is supplied and is independent of the price level.
Short:
- Period of time where input prices are sticky and do not adjusts to changes in the price level.
- The level of real GDP supplied is directly related to the price level.
Long run aggregate supply (LRAS)
- Marks the level of full employment in the economy (analogous to PPC)
- Because input prices are completely flexible in the long run changes in price level do not change firms real profits and therefore do not change firms level of output. This means that LRAS
vertice at the economy's level level of full employment.
Short run aggregate supply (SRAS)
- Because input prices are sticky in the short run, the SRAS is upward sloping.
Changes in SRAS
- Increase in SRAS is seen as a shift to the right. -->
- Decrease in SRAS is seen as a shift to the left. <--
-Key to understanding shifts in SRAS is per unit cost of production.
Per unit production cost:
Total input cost / total output
Determinants of SRAS
(all affect unit production cost)
- Input prices
- Productivity
- Legal institutional environment
*Input Prices:
Domestic resource prices
-Wages
-Cost of capital
-Raw material (commodity prices)
Foreign resource prices
-Strong $: Lower foreign resource prices
-Weak $: Higher foreign resource prices
-Market power Monopolies and cartels that control resources control the price of those resources
Increase in resource prices SRAS shifts to the left. <--
(Vice Versa)
*Productivity
Total output / total inputs
More productivity = Lower unit production cost = SRAS shifts to the right -->
(Vice Versa)
*Legal institutional environment
- Taxes ans subsidies
Taxes: ($ to gov't) on business' increase per unit production cost. SRAS shifts to the left <--
Subsides: ($ from gov't) to business reduce per unit production cost SRAS shifts to the right. <--
Government regulation creates a cost of compliance SRAS shifts to the left. <--
Deregulation reduce compliance cost SRAS shifts to the right. -->
Your blog post is very organized which helps me understand the notes better. And I like how you added pictures of the graphs to give more input on the topic. Something I am having trouble with is trying to determine which determinant goes with what. So I would suggest that you put some examples of problems that relates to input prices, productivity, and legal institutional environment, solve it, and then explain why that determinant goes with that specific problem.
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