1. Shifting Aggregate Supply
SRAS & LRAS Shifts

2. Short Run Equilibrium
Output deviates only in short run when actual price level deviates from expected price level
In long run, wages & prices are not “sticky” and do not affect output (price level has no effect)
Prices/wages become flexible!

3. Shifts in LRAS Curve
Shifts occur when a factors of production changes:
Labor
Capital
Natural resources
Technology
Government Incentives
Why: Any change which alters the natural rate of output shifts the LRAS curve
When LRAS shifts so does SRAS

4. LABOR CAPITAL NATURAL TECHNOLOGY RESOURCES
Shifts in the Long Run Aggregate Supply Curve (LRAS)
LABOR CAPITAL NATURAL TECHNOLOGY
RESOURCES
Discovery of new resources
Change in old resources
Increase in Labor Force
Change in Natural
Rate of Unemployment
New Technology
More Free Trade
Any Shift in Capital Stock
Physical capital or
Human capital

5. Recent History: The 1980’s & 1990’s
Changes in Government Policy which provide incentives to invest in capital stock or technology shift LRAS right
PPF Graph
Price
Level
LRAS1
LRAS2
Why the USA
had a strong
Economy during
1980’s & 1990’s Y1
Real
GDP Y2
Recent History: The 1980’s & 1990’s
Technology Breakthroughs occur in USA Economy

6. Changes in the other 5 variables
Shifts in SRAS Curve
Shifts occur when with a change in:
Expected Price Level
Input Prices
Labor
Capital
Natural resources
Technology
Gov’t Incentives
Shift SRAS but NOT LRAS
Changes in the other 5 variables
Shifts BOTH curves (LRAS & SRAS)

7. Shifting SRAS
Event: Input prices suddenly rise

8. AD/AS Shift Worksheet

9. Expected Price Level (inflation)
Increase in expected price level:
Shifts the SRAS curve to left (less supply)
Decrease in expected price level:
shifts SRAS curve to right (more supply)
Rise in Expected Inflation will result
in workers demanding higher pay
Costs rise => Less is Supplied
Should title be, “Why the short-run aggregate supply…”

10. Example: Increase in Price Level
1. An increase in expected price
Level causes a shift . . .
Price
Level
SRAS1
SRAS2 .
AD1 B Y2 P2 Y A P
and
the price
level to rise.
…………….
Real GDP
causes output to fall . . .

11. Variables that shift AS:
LRAS1
LRAS2
Price
Level
Real GDP
Variables that shift AS:
1. Labor Force
Increase in any variable will
shift PPF curve out
2. Natural resources
3. Capital
4. Technology
5. Gov’t Incentives