 Aggregate Supply: the relationship between the general price level and real output produced in the economy  With this comes:  Aggregate Supply Schedule  Aggregate Supply Curve (AS) 10.2 Aggregate Supply

 Price level and real output are directly related  At higher prices in economy: businesses encouraged to produce more  At lower prices in economy: businesses might not make a profit so they reduce output  Price changes that result in varied output are represented by movement along the aggregate supply curve The Aggregate Supply Curve

 At low output levels (A), businesses produce significantly below capacity; AS curve relatively flat  At output increases (C & D), businesses produce above their normal capacity; AS curve is steep The Aggregate Supply Curve Real GDP (2002 $ billions) Price Level (GDP Deflator, 2002 = 100)

 Price level is one factor that can influence real output  Other factors are called: Aggregate Supply Factors  Input Prices  Resources Supplies  Productivity  Government Policies Changes in Aggregate Supply

 Aggregate supply assumes steady input prices for businesses producing the output  Things that alter production costs:  Increase in wages  Decreased prices for imported raw materials due to rise in dollar  When rise in prices of an input pushes up production costs, businesses reduce their real output and AS curve shifts to the left  If input prices decrease, production costs fall and AS curve shifts to the right  Note that during both these processes, the economy’s potential output stays the same Input Prices

 A drop in wage rate results in an increase in real output at every price level, from the blue curve to the purple curve  The movement is greatest at low price levels, where substantial excess capacity exists Short-Run Change: Aggregate Supply

 With more time, there will be more resources in an economy  Over the long run, more inputs means increased AS  Long-run increase in aggregate supply  With a long-run reduction in amounts of resource, businesses produce lower real output at all prices  Long-run decrease in aggregate supply Resource Supplies

 Productivity: the real output produced per unit of input over a given period of time  e.g. Labour productivity is the quantity of output produced per worker in a certain period of time  Increases in productivity: largely due to technological progress  Technological advance: shifts AS to the right, increasing potential output  Technological decline: shifts AS to the left, decreasing potential output Productivity

 Imagine taxes rise for businesses and households  They will want to decrease their supply of resources in the long- run at every price level  A tax decrease would result in expansion of resources and rise in real output  Government regulations (e.g. environmental and safety) typically raise per-unit costs for businesses  More regulation causes businesses to produce less real output at every price level  Long-run decrease in aggregate supply Government Policies

 Advances in technology in the realm of IT, causes information to be shared faster and more efficiently  This caused and is still causing Canada’s aggregate supply curve to shift rightward Information Revolution & Canada’s Aggregate Supply Curve