Short-Run Aggregate Supply

What is AS? Aggregate Supply: The schedule or curve showing the level of real domestic output that firms will produce at each price level.

Short-Run Aggregate Supply SRAS What is the Short Run? A period in which resource prices do not match changes in the price level of the output. This occurs because firms do not have time to adjust to changes in the price level. During this period, the prices of the factors of production are fixed.

The SRAS Curve (INCENTIVES!)

The Shape of the SRAS Curve Horizontal -unemployment & high excess capacity. Upsloping - increases in output cause increases in the price level; full-employment near so producer costs rise. Vertical - at full-employment & capacity. So increased output = increased resource and product prices. Economy is at its potential output.

Equilibrium and SRAS Below Q*, the slope of the AS curve is relatively flat. Unused resources can be put back to work with little upward pressure on per-unit production costs. Above Q*, the slope of the AS curve is relatively steep. The majority of resources are already employed, so adding more reduces efficiency.

The Determinants of Short-Run AS: What Changes Production Costs? Input Prices Domestic Resource Availability Productivity

Determinants of AS: 1) Input Prices The Domestic Availability of the Factors of Production (L, L, C, E). The Price of Imported Resources (cheaper foreign resources means we can increase AS). The Market Power of major resource suppliers (OPEC raising oil prices, reduces domestic AS).

Determinants of AS: 2) Productivity Productivity = total output/total input. An increase in productivity enables the economy to obtain more real output from its resources. By reducing the per-unit production cost, increased productivity shifts AS right. Improved technology, more educated workforce, improved forms of business enterprises, and the reallocation of labour can increase productivity.

Determinants of AS: 3) Legal-Institutional Environment Business taxes and subsidies: Taxes ↑, per-unit production costs ↑, AS↓ Subsidies ↑, per-unit production costs ↓, AS ↑ Government regulations:  regulations ↑, per-unit production costs ↑, AS ↓

Test Preparation Key Questions Page 250, numbers 1 and 2.