Mr. Henry Aggregate Supply

Review from AD: What issues do you see in aggregate demand if people are saving more and spending less, thus a shift of the demand curve to the left?

What is Aggregate Supply? The total value of all goods & services that all firms would produce in a specific period of time at various price levels.

The three horizons: In the immediate short run, both input prices as well as output prices are fixed In the short run, input prices are fixed, but output prices can vary In the long run, input prices as well as output prices can vary AS varies depending on the time horizon and how quickly output prices and input prices can change Variables of Time for AS

This can last from a few days to a few months It lasts as long as both input prices and output prices stay fixed. This supply curve is horizontal because output prices are fixed and firms are selling however much customers want to purchase at those fixed prices. Can you think of an example? Appliance Manufacturers will set an annual list of prices Car manufacturers will set their MSRP on cars and trucks AS in the Immediate Short Run

Period of time during which output prices are flexible, but input prices are either totally fixed or highly inflexible It is short run because prices that a consumer is charged can change. This supply curve slopes upward because, with input prices fixed, changes in the price level will raise or lower real firm profits What do you notice about this curve before and after Q f Notice that the AS curve is relatively flat below the full-employment output because unemployed resources and unused capacity allow firms to respond to price-level rises with large increases in real output It is relatively steep beyond the full employment output because resource shortages & capacity limitations make it difficult to expand Example: UPS labor costs (Input) are fixed by contracts but can change Shipping costs to its customers (output flexible)

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Period of time during which both input prices as well as output prices are flexible. It begins after the short run ends. It may be from a couple of weeks to several years in the future. This supply curve is vertical because in the long run, the economy will produce the full-employment output level no matter what the price level What limits firms from increasing output if there were higher prices? Labor shortages / workers demand more $ or overtime pay Demand on the economy’s limited supply of resources = rising input prices subtracted away from firm’s profits Can you think of any examples that illustrate this? Some business may not expand because of new taxes / health care Technology advancements, such as the computer, make production cheaper.

D

Lack of consumer confidence Declining housing prices Consumers save more

when the country and the economy is trying to expand and grow

But the (FOMC) pulls money in from circulation, and is instituting a restrictive monetary policy

So, consumers and businesses also tend to be like squirrels when there is a lack of confidence in what is happening in the economy. This causes them to cut back their spending, stop eating out, stop spending money on anything that is not a necessity. Without this money flowing through the businesses that consumers and businesses patronize, then it is also prohibits the money from reaching the general economy. Again, this will cause slow economic growth. It leads to one of the primary causes of slow economic growth!