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 AS slopes 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

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