1. The Long Run Aggregate Supply Curve
The Long run AS curve represents the economy at its full employment/natural rate of unemployment level.
It is the level of output that an economy can produce if all of its resources are fully employed.

2. The Long-Run Aggregate Supply Curve
In the long-run, an economy’s production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services.
The price level does not affect these variables in the long run.

3. The Long-Run Aggregate- Supply Curve...
Price Level
Long-run
aggregate
supply P1
1. A change in the price level…
2. …does not affect the quantity of goods and services supplied in the long run. P2
Natural rate
of output
Quantity of
Output

4. Why the Long-Run Aggregate Supply Curve Might Shift
Shifts arising from Labor
Shifts arising from Capital
Shifts arising from Natural Resources
Shifts arising from Technological Knowledge

5. Long-Run Growth Price Level
LRAS1980
1. In the long-run, technological progress shifts long-run aggregate supply...
LRAS2000
LRAS1990
Y1990
Y2000
2. …leading to growth in output...
Y1980
Quantity of
Output

6. SHORT RUN AGGREGATE SUPPLY
Short-run aggregate supply measures current production within our economy
It is determined by current price levels and two factors
The cost of production
Input prices
Productivity levels (technology)
Legal-institutional factors (taxes and government regulations)
Changes in the expected price level

7. SHORT RUN AGGREGATE SUPPLY
There are three reasons why the Short run Aggregate Supply curve is upward sloping.
Sticky wages - as prices rise wages may be slow to follow, allowing business owners to profit from higher prices.
Sticky prices- all prices do not rise simultaneously. A business that is slow to raise their prices may sell more in the short run.
Misperceptions of price increases – a business owner may assume incorrectly that the increase in price level is the result of an increase in demand for THEIR product and therefore increase production.

8. SHORT-RUN AGGREGATE SUPPLY
A higher price level increases profits and output moving the economy from a1 to a2
AS1 P2 a2
Price Level P1 a1 o Q1 Q2
Real domestic output

9. SHORT-RUN AGGREGATE SUPPLY
A lower price level decreases profits and output moving the economy from a1 to a3
AS1 P2 a2
Price Level P1 a1 P3 a3 o Q3 Q1 Q2
Real domestic output

10. Why the Short-run Aggregate Supply Curve Might Shift
Shifts arising from a change in Labor costs.
Shifts arising from a change in Capital costs.
Shifts arising from a change in Natural Resource costs.
Shifts arising from a change in Technology.
Shifts arising from a change in the Expected Price Level.

11. A Decrease in Aggregate Supply...
1. An adverse shift in the short-run aggregate-supply curve…
AS2
Price
Level
Long-run
aggregate
supply
Short-run aggregate
supply, AS1
2. …causes output to fall… B Y2
3. …and the price level to rise. P2 A P1
Aggregate demand Y1
Quantity of
Output

12. An Increase in Aggregate Supply
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
An Increase in Aggregate Supply
Long-run
aggregate
supply
Price
Level
Short-run aggregate
supply, AS1
AS2 P1 A P2 B
Aggregate
demand, AD1 Y1 Y2
Quantity of
Output

13. Expected Inflation and Actual Inflation
The short-run trade-off between unemployment and inflation exists only because of misperceptions about the actual rate of inflation.
In other words actual inflation may be different from expected inflation.
If actual inflation is higher than what workers expected there will be an increase in output and a decrease in unemployment.

14. Price Level o Real domestic output
Expected versus Actual Inflation – higher than expected price levels increase output
ASLR
AS1 P2 a2 a1
Price Level P1 o Q1 Q2
Real domestic output

15. Shifts Arising from a Change in Expected Price Level
When people expect an increase in price levels they tend to set wages high. This shifts the short-run aggregate supply curve to the left.
When people expect a decrease in price levels the tend to set wages low. This shifts the short-run aggregate supply curve to the right.

16. Price Level o Real domestic output
AGGREGATE SUPPLY IN THE SHORT AND LONG-RUN
A higher expected price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left. The result is higher prices, but a return to the original level of output.
AS2 b1
AS1 P2 a2 a1
Price Level P1 o Q1 Q2
Real domestic output

17. Price Level o Real domestic output
AGGREGATE SUPPLY IN THE SHORT AND LONG-RUN
A lower expected price level reduces nominal wages and shifts the short-run aggregate supply to the right. This results in lower prices, but a return to the original level of output.
ASLR
AS2 b1
AS1 P2 a2
AS3 a1
Price Level P1 P3 a3 c1 o Q3 Q1 Q2
Real domestic output

18. AGGREGATE SUPPLY IN THE
SHORT AND LONG-RUN
Short Run -
Period in which nominal wages (and other input prices) remain
fixed as the price level increases or decreases
Long Run -
Period in which nominal wages are fully responsive to previous changes in the price level