1 / 10

Aggregate Supply

Aggregate Supply. The LRAS. Represents the fact that the total potential for output in an economy is independent of the price level. This is because real GDP depends on factors other than the price level.

ciqala
Download Presentation

Aggregate Supply

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Aggregate Supply

  2. The LRAS • Represents the fact that the total potential for output in an economy is independent of the price level. • This is because real GDP depends on factors other than the price level. • Thus there is no relationship between real GDP and the price level . . . in the long run. The short run is another matter.

  3. LRAS (cont’d) • This disconnect between real GDP and the price level in the long run is an application of something called the classical dichotomy. • Which is just a fancy way of saying that in the long run, increases in the price level don’t make a country more productive.

  4. Things that shift the LRAS curve Shifts arising from Labor. Think of a large influx of labor and the effect that would have on real GDP. (LRAS shifts right) The position of the LRAS depends on the natural rate of unemployment, which tells us where full employment is along the real GDP axis. If unemployment permanently rises, the LRAS curve shifts left.

  5. Things that shift the LRAS curve 2. Changes in Physical Capital. Capital stock (physical capital) increases an economy’s productivity. The LRAS curve will shift out if a nation uses its resources to produce more capital goods. 3. Changes in Human Capital. Using the same logic, improvements in a nation’s human capital increases productivity, shifting LRAS to the right.

  6. Things that shift the LRAS curve 4. Changes in Natural Resources. This includes not only natural resources within the nation, but the availability of resources that are imported. 5. And last, and most important, changes in Technology. This is because technology makes everything else more productive.

  7. Short-run Aggregate Supply • Slopes upward because, unlike the LRAS curve, there is a relationship between the price level and real GDP . . . in the short run. • There a several reasons the SRAS curve may slope upward in the short run.

  8. Reasons for an upward sloping SRAS curve • 1. Misperceptions. If the price level starts to fall, firms may mistakenly believe that their relative prices have fallen and reduce their level of output. • 2. Sticky-wage theory. If wages are attached to contracts and the price level falls, firms are still “stuck” paying those higher wages, so they may have to reduce their output. A lower price level makes production less profitable, so firms produce less output.

  9. Reasons for an upward sloping SRAS curve • 3. Sticky price theory. An unexpectedly low price level leaves some firms with higher-than-desired prices, which slows their sales and leads them to cut back on production.

  10. What shifts the SRAS Curve? • This part is easy . . . everything that shifts the LRAS curve also shifts the short-run aggregate supply curve. • In addition, people’s expectations about the price level. This works very much like expectation of future prices in microeconomics.

More Related