Aggregate Supply Chapter 11 — one week

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:  Substantial unemployment and excess capacity (unemployed resources)  Economy is far below full employment  Might be in a recession or depression

Upwardsloping or Intermediate Range SRAS Curve PL SRAS GDPr

Upsloping or Intermediate Range  Conditions  Closer to full-employment levels, which create upward pressure on prices  Upward pressure on prices is caused by rising costs of doing business

Vertical Range SRAS Curve PL SRAS GDPr

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

Putting it together PL GDPr SRAS A B C A = horizontal B = upsloping C = vertical

Determinants of AS  1. Change in input prices: Availability of resources (4 factors) Availability of resources (4 factors) Prices of imported resources Prices of imported resources Market power of certain industries Market power of certain industries

Determinants of AS cont.  2. Change in productivity can cause changes in per-unit production cost Productivity rises, unit production costs will  Productivity rises, unit production costs will  Shift to the right and lower pricesShift to the right and lower prices Productivity falls, unit production cost will  Productivity falls, unit production cost will  Shift to the left and increase pricesShift to the left and increase prices

Determinates of AS cont.  3. Change in legal-institutional environment: Business taxes and or subsidies Business taxes and or subsidies Cost of gov’t regulation Cost of gov’t regulation

Change in SRAS?   or NC Determinate?  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. low birth rate will decrease the labor force in the future.

Change in SRAS?   or NC  1. unions grow more aggressive; wage rates increase  or shift to the left—change in input prices  or shift to the left—change in input prices  2. labor productivity increases dramatically  or shift to the right—change in productivity  or shift to the right—change in productivity  3. OPEC successfully increases oil prices  or shift to the left—change in input prices  or shift to the left—change in input prices  4. computer technology brings new efficiency to industry  or shift to the right—change in productivity  or shift to the right—change in productivity  5. Gov’t spending increases NC—gov’t spending would shift the AD curve. NC—gov’t spending would shift the AD curve.

 6. giant natural gas discovery decreases energy prices  or shift to the right—change in input prices  or shift to the right—change in input prices  7. low birth rate will decrease the labor force in the future. NC—will not affect aggregate supply for 16 years or more NC—will not affect aggregate supply for 16 years or more

Homework  Page 222  Numbers 1, 2, and 7

Long Run Aggregate Supply PL Output or GDPr LRAS

 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  Developing more & better resources or improving tech. will shift the curve outward but it will still be vertical