1. Please read the following License Agreement before proceeding.
License Agreement for Use of Electronic Resources
The illustrations and photographs in this PowerPoint are protected by copyright. Permission to use these materials is strictly limited to educational purposes associated with the course for which you have adopted Krugman’s Economics for AP®, Second Edition.
You may project these materials in lectures, post them on password-protected course websites, include them in course documents, or use them in any other manner that is consistent with their intended use as materials to aid in the teaching of the course for which you have purchased Krugman’s Economics for AP®, Second Edition. The following restrictions apply to materials posted on course websites:
The website must be available only to students taking the course for which you have adopted our program or to registered users of your institution’s network. They may not be posted on sites accessible to the general public outside your institution. Please note that this restriction is an IMPORTANT PROTECTION FOR YOU: Copyright holders will seek (and have sought) legal action if you post copyrighted photographs or other materials to open-access sites.
If requested, you must provide BFW/Worth Publishers with the URL and password required to access the site.
The name of the copyright holder (BFW/Worth Publishers, unless otherwise indicated) must appear with each item at all times. Note: Most of the photos herein are owned by other parties/individuals. The copyright holder is listed with the image.
You may not post materials other than in the context of course material for the course for which you have adopted our program.
You may not distribute these materials to others not associated with the course for which you have adopted our program. Nor may you use any of the materials in any context other than the teaching of this course, without first receiving written permission from the copyright holder (BFW/Worth Publishers, unless otherwise indicated).
In using these PowerPoint slides, you agree to accept responsibility for protecting the copyrights to the materials contained herein.
If you have any questions regarding permitted uses of these materials, please contact:
Permissions Manager BFW/Worth Publishers 33 Irving Place, 10th Floor New York, NY

2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 4
Module 18

4. What You Will Learn in this Module
Use the aggregate supply curve to illustrate the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
Identify the factors can shift the aggregate supply curve
Explain why the aggregate supply curve is different in the short run from in the long run
What You Will Learn in this Module
Section 4 | Module 18

5. Aggregate Supply
The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output in the economy.
Section 4 | Module 18

6. The Short-Run Aggregate Supply Curve
The short-run aggregate supply curve is upward-sloping because nominal wages are sticky in the short run:
a higher aggregate price level leads to higher profits and increased aggregate output in the short run.
The nominal wage is the dollar amount of the wage paid.
Sticky wages are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.
Section 4 | Module 18

7. The Short-Run Aggregate Supply Curve
[Insert Content Here]
Aggregate price
level (GDP deflator,
2005 = 100)
Short-run aggregate
supply curve, SRAS
10.6
1929
A movement down
the SRAS curve leads
to deflation and lower
aggregate output.
7.9
1933
$716
977
Real GDP (billions of
2005 dollars)
Section 4 | Module 18

8. Shifts of the Short-Run Aggregate Supply Curve
[Insert Content Here]
(a) Leftward Shift
(b) Rightward Shift
Aggregate price level
Aggregate
price level
SRAS
SRAS 2 1
SRAS
SRAS 1 2
Decrease in Short-Run Aggregate Supply
Increase in Short-Run
Aggregate Supply
Real GDP
Real GDP
Section 4 | Module 18

9. Shifts of the Short-Run Aggregate Supply Curve
Changes in expected inflation, commodity prices, nominal wages, or productivity lead to changes in producers’ profits and shift the short-run aggregate supply curve.
A commodity is a standardized input bought and sold in bulk quantities, such as oil, coffee, or copper.
Section 4 | Module 18

10. Factors that Shift Short-Run Aggregate Supply
Section 4 | Module 18

11. Long-Run Aggregate Supply Curve
The long-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.
Section 4 | Module 18

12. Long-Run Aggregate Supply Curve
[Insert Content Here]
Aggregate price
level (GDP deflator,
2005 = 100)
Long-run aggregate
supply curve, LRAS
15.0
…leaves the quantity
of aggregate output
supplied unchanged
in the long run.
A fall in the aggregate price level
7.5
Potential output, YP
$800
Real GDP (billions of
2005 dollars)
Section 4 | Module 18

13. Actual and Potential Output from 1989 to 2013
Section 4 | Module 18

14. From the Short Run to the Long Run
(a) Leftward Shift of the Short-Run
Aggregate Supply Curve
(b) Rightward Shift of the Short-Run
Aggregate Supply Curve
Aggregate
price level
Aggregate
price level L R AS L R AS S R AS S R AS 2
A fall in nominal wages shifts SRAS rightward. 1 S R AS 2
A rise in nominal
wages shifts SRAS
leftward. S R AS 1 A1 A1 P P 1 1 Y Y
Real GDP Y Y P 1 1 P
Real GDP
Section 4 | Module 18

15. Prices and Output During the Great Depression
F Y I
Prices and Output During the Great Depression
Section 4 | Module 18

16. Summary
The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied.
The short-run aggregate supply curve is upward sloping because nominal wages are sticky in the short run.
Changes in commodity prices, nominal wages, and productivity lead to changes in producers’ profits and shift the short-run aggregate supply curve.
In the long run, all prices are flexible and the economy produces at its potential output, and the long-run aggregate supply curve is vertical at potential output.
Section 4 | Module 18