Transcript Aggregate Supply

Aggregate Supply – Short
Run
AP Macroeconomics
Where we came from…


Aggregate demand represents the sum of
consumption (C), investment spending (I),
government spending (G), and net exports (X-IM
or NX)
The quantity of goods and services demanded
at any given price level is aggregate
demand!
Where are we going?
Aggregate Supply is the quantity of output
that firms are willing and able to produce
for the economy. (i.e., the total supply of
all goods and services in the economy)
In the LONG RUN, the level of output
depends on:
1) capital stock
2) the labor force (productivity)
3) level of technology
Today, our concern is the
SHORT RUN.
In this lesson…

You will learn about the determinants of
aggregate supply and understand
movements along, and shifts in, the
aggregate supply curve.
~Determinants
~Movements
~Shifts
Aggregate Supply Curve
…shows the relationship between the total
quantity of output supplied by all firms and
the overall price level.
It is not the sum of individual firm supply
curves. It is the relationship between
production and the price level. It does not
hold costs and prices constant, as in
microeconomics.
Short-Run Aggregate Supply Curve…
What does it hold constant?



Money wages
Resource prices
Potential GDP
Why? When we hold these constant, as overall
prices rise then firms produce more output.
What is “potential GDP”?
“a measure of the real value of the services and
goods that can be produced when a country's
factors of production are fully employed.”
Definition adopted from : Potential GDP - Definition of Potential GDP - QFINANCE
What does the SRAS look like?
Y* represents potential
real GDP. It is fullemployment output
(vertical at full
employment).
SRAS is the short-run
aggregate supply
curve.
This (LRAS) is the
Long-Run Aggregate
Supply Curve
The SRAS curve can
be represented as a
vertical, horizontal,
or positively sloped
line (usually, it is
positively sloped).
Visual 3.9, Unit 3 Macroeconomics, National Council on Economic
Education, http://apeconomics.ncee.net
What causes a shift?

The SRAS will change (a shift
in the curve) if the potential
GDP changes (this is that
forecast), if labor productivity
changes, or if money wages or
other resource/commodity
prices change.
What causes a change in
potential GDP
(LRAS)?

A change in full employment
quantity of labor, a change in
quantity of capital or
technological advance.
Note: We’ll come back to shifts in LRAS in a later lesson…
Shifts in Aggregate Supply
1. Potential GDP increases
from Y* to Y*1. The LRAS
shifts to LRAS1 and the
short-run aggregate supply
curve shifts to SRAS1.
2. Decrease in resource
prices will shift the SRAS to
SRAS1. A decrease in the
money wage rate does not
change the LRAS.
Visual 3.10, Unit 3 Macroeconomics, National Council
on Economic Education, http://apeconomics.ncee.net
Determinants (that shift) of Aggregate
Supply

An increase in labor
productivity. What
affect will this have on
the supply curve?

This will shift the
SRAS to the right.
Determinants of Aggregate Supply

An increase in the
average wage rate.
How will this affect the
supply curve?

This will shift the
SRAS to the left.
Determinants of Aggregate Supply

An increase in
technology. How will
this shift the curve?

this will shift the
SRAS to the right.
And now…

Some resources:
http://www.reffonomics.com/textbook2/macroec
onomics2/keynesianthought/keynesiancross.
swf
Works Cited




Economics of Seinfeld. Demand.
http://yadayadayadaecon.com/clip/46/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.