Transcript Aggregate Supply

Aggregate Supply
Chapter 11 — one week
Definition
 AS
is a schedule showing level of
real domestic output available at
each possible price level.
Possible Shapes of Aggregate
Short Run Supply Curve
 Horizontal
SRAS Curve
PL
SRAS
GDPr
Horizontal
 Conditions:
 Substantial
unemployment and excess
capacity (unemployed resources)
 Economy is far below full employment
 Might be in a recession or depression
Upwardsloping or Intermediate
Range SRAS Curve
PL
SRAS
GDPr
Upsloping or Intermediate Range
 Conditions
 Closer
to full-employment levels, which
create upward pressure on prices
 Upward pressure on prices is caused by
rising costs of doing business
Vertical Range SRAS Curve
PL
SRAS
GDPr
Vertical Range SRAS Curve
 Conditions:
 Absolute
capacity is assumed—the
economy is unable to produce any more G
& S for a long period of time
 Any attempt to increase output will bid up
resource and product prices
Putting it together
SRAS
PL
C
B
A
GDPr
A = horizontal
B = upsloping
C = vertical
Determinants of AS
 1.



Change in input prices:
Availability of resources (4 factors)
Prices of imported resources
Market power of certain industries
Determinants of AS cont.
 2.
Change in productivity can cause
changes in per-unit production cost

Productivity rises, unit production costs will 
• Shift to the right and lower prices

Productivity falls, unit production cost will 
• Shift to the left and increase prices
Determinates of AS cont.
 3.
Change in legal-institutional
environment:


Business taxes and or subsidies
Cost of gov’t regulation
Change in SRAS?   or NC
Determinate?







1. unions grow more aggressive; wage rates
increase
2. labor productivity increases dramatically
3. OPEC successfully increases oil prices
4. computer technology brings new efficiency to
industry
5. Gov’t spending increases
6. giant natural gas discovery decreases energy
prices
7. low birth rate will decrease the labor force in
the future.
Change in SRAS?   or NC

1. unions grow more aggressive; wage rates increase
  or shift to the left—change in input prices
 2. labor productivity increases dramatically
  or shift to the right—change in productivity
 3. OPEC successfully increases oil prices
  or shift to the left—change in input prices
 4. computer technology brings new efficiency to industry
  or shift to the right—change in productivity
 5. Gov’t spending increases
 NC—gov’t spending would shift the AD curve. 
 6.
giant natural gas discovery decreases
energy prices

 or shift to the right—change in input prices
 7.
low birth rate will decrease the labor
force in the future.

NC—will not affect aggregate supply for 16
years or more
Homework
 Page
222
 Numbers 1, 2, and 7
Long Run Aggregate Supply
LRAS
PL
Output or GDPr
 Represents
the Q of g & s a nation can
produce over a sustained period of time
using its productive resources efficiently
 LRAS is at full employment
 Developing more & better resources or
improving tech. will shift the curve outward
but it will still be vertical