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Aggregate Supply

Aggregate Supply. Unit 3 Chapter 11. 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:

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Aggregate Supply

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  1. Aggregate Supply Unit 3 Chapter 11

  2. Definition • AS is a schedule showing level of real domestic output available at each possible price level.

  3. Possible Shapes of Aggregate Short Run Supply Curve • Horizontal SRAS Curve PL SRAS GDPr

  4. Horizontal • Conditions: • Substantial unemployment and excess capacity • Might be in a recession or depression

  5. Upward sloping or Intermediate Range SRAS Curve PL SRAS GDPr

  6. Upward sloping or Intermediate Range • Conditions: • Closer to full-employment levels • Upward pressure on prices is caused by rising costs of doing business

  7. Vertical Range SRAS Curve PL SRAS GDPr

  8. 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

  9. Aggregate Range SRAS PL A = horizontal B = upward sloping C = vertical C B A GDPr

  10. Determinants of AS • 1. 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

  11. 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

  12. Determinates of AS cont. • 3. Change in legal-institutional environment: • Business taxes and or subsidies • Cost of gov’t regulation (pollution clean up)

  13. Change in SRAS?   or NC • 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.

  14. 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. 

  15. 6. giant natural gas discovery decreases energy prices •  or shift to the right • 7. cuts in tax rates increase incentives to save • NC— would shift the AD curve • 8. low birth rate will decrease the labor force in the future. • NC—will not affect aggregate supply for 16 years or more—we graph for TODAY.  • Any questions?

  16. Long Run Aggregate Supply LRAS PL Output or GDPr

  17. 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

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