Transcript Aggregate Supply

Aggregate Supply
Krugman Section 4 Module 18
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
 Might be in a recession or depression
Upward sloping or Intermediate
Range SRAS Curve
PL
SRAS
GDPr
Upward sloping or Intermediate
Range
 Conditions:
 Closer
to full-employment levels
 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
 Full employment is assumed
Aggregate Range
SRAS
PL
C
B
A
GDPr
A = horizontal
B = upward sloping
C = vertical
Determinants of AS
 1.
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Change in input prices:
Availability of resources (4 factors)
Prices of imported resources
Market power of certain industries
This was also in the eeb book
This is the most common determinant
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
Determinants of AS cont.
 3.
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Change in legal-institutional environment:
Business taxes and or subsidies
Cost of gov’t regulation (pollution clean up)
Determinants of AS cont.
 4.

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Inflationary expectations
Workers will ask for higher wages
Banks will charge higher interest rates
Change in SRAS?   or NC
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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. cuts in tax rates increase incentives to save
8. 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
 2. labor productivity increases dramatically
  or shift to the right
 3. OPEC successfully increases oil prices
  or shift to the left
 Always think of oil as an input. Many things are made
with oil—don’t think just gas
 4. computer technology brings new efficiency to industry
  or shift to the right
 5. Gov’t spending increases
 NC—gov’t spending would shift the AD curve. 

6. giant natural gas discovery decreases energy
prices


7. cuts in tax rates increase incentives to save


 or shift to the right
NC— would shift the AD curve
8. low birth rate will decrease the labor force in
the future.
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
NC—will not affect aggregate supply for 16 years or
more—we graph for TODAY. 
Any questions?
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
 4 factors of production will shift the LRAS