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Aggregate Supply: Short – Run & Long – Run

Aggregate Supply: Short – Run & Long – Run. Short-run Aggregate Supply. Aggregate Supply (AS) shows the quantity of real GDP produced at different price levels. Short-run AS slopes upward a higher price level (holding production costs and capital constant in the short-run)

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Aggregate Supply: Short – Run & Long – Run

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  1. Aggregate Supply: Short – Run & Long – Run

  2. Short-run Aggregate Supply • Aggregate Supply (AS) shows the quantity of real GDP produced at different price levels. • Short-run ASslopes upward • a higher price level (holding production costs and capital constant in the short-run) • higher profit margins • firms want to produce more.

  3. Short – Run Aggregate Supply: Constant Returns

  4. Shape of Short-run AS (SRAS) • In the short-run, the capital stock can’t change. • the number of factories and machines is constant • increasing labor input increases output … but at a diminishing rate • More and more workers are sharing the same capital stock • Diminishing returns  an ever-steeper SRAS curve.

  5. Short – Run Aggregate Supply: Diminishing Returns

  6. The Shape of Long-run AS (LRAS) • Resource costs are NOT fixed in the long-run. • As prices rises, workers demand and get higher wages Profits don’t rise with price • The amount of capital is NOT fixed in the long-run • firms can build new plants and buy new equipment over the long-run. • AS is set by production possibilities in the long-run • LRAS is not affected by prices • LRAS is vertical: higher prices cannot elicit more output in the long-run.

  7. Long-Run Aggregate Supply: Potential Real GDP

  8. Determinants of Aggregate Supply

  9. Determinants of Aggregate Supply

  10. Determinants of Aggregate Supply

  11. Shifting the Long-Run Aggregate Supply Curve Growth occurs as the labor force and capital stock grow and as technological innovation improves production efficiency.

  12. Changes in Short-Run Aggregate Supply

  13. Effects of a Change in Aggregate Supply Cost-push inflation: cost increases push AS to the left causing price level increases (inflation).

  14. Aggregate Demand - Aggregate Supply Equilibrium

  15. Aggregate Demand and Supply Equilibrium: Short-run and long-run responses to increase in aggregate demand

  16. Economic Insight: OPEC and a decrease in aggregate supply

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