Aggregate Supply (2/21)
AS - the lvl of Real GDP (GDPR) that firms will produce at each Price Lvl (PL)
Long Run AS - period of time where input prices are completely flexible and adjust to changes in PL; lvl of GDPR supplied is independent of PL (Vertical) ; analogous to PPC as LRAS marks the lvl of full employment in the economy
Short Run AS - period of time where input prices are sticky and do not adjust to changes in PL; lvl of GDPR supplied is directly related to PL (Upward Sloping)
Increase in SRAS - shift right
Decrease in SRAS - shift left
Key to understanding SRAR is per unit cost of production
per unit cost of production = total input cost/total output
Determinants of SRAS
Input Prices
- Domestic Resource Prices (wages, cost of capital, raw materials)
- Foreign Resource Prices
- Market Pwr (monopolies & cartels)
- Increase in Resource Prices, SRAS shifts left
- Decrease in Resource Prices, SRAS shifts right
Productivity
- productivity = total output / total input
- more productivity = SRAS shifts right
- less productivity = SRAS shifts left
Legal-Institutional Environment
- Taxes - SRAS shifts left
- Subsidies - SRAS shifts right
- Gov't Regulation - SRAS shifts left
- Gov't Deregulation - SRAS shifts right
You should also add this to your notes:
ReplyDeleteLong Run
• Period of time where input prices are completely flexible and adjust to changes in the price level
• In the long run, the level of GDPR supplied is independent of the price level.
Long Run Aggregate Supply (LRAS)
• Marks the level of full employment in the economy (analogous to PPC).
AS/AD Model
• The equilibrium of AS and AD determines correct output and the price level.
Full Employment Equilibrium
• Exists where AD intersects SRAS/LRAS at same point
Inflationary Gap
• Output is high, unemployment < NRU
Recessionary Gap
• Output low, unemployment > NRU