1. Aggregate Supply
AP Macroeconomics

2. Aggregate Supply
The sum total of all final goods and services which firms plan to produce.

3. Neo-Classical AS Curves
The AS curve shows the total quantity of g&s firms produce and sell at any given price level.
LRAS
aPL
rGDP
SRAS
In the short run, AS is upward-sloping.
The slope of the AS curve depends on the time horizon:
In the short run, the aggregate supply curve is upward-sloping. (Hence the upward-sloping curve labeled “SRAS” – “SR” stands for “short run”).
In the long run, the aggregate supply curve is vertical.
These slopes will be explained in the following slides.
In the long run, AS is vertical.

4. Short Run Aggregate Supply (SRAS)
The SRAS curve is upward sloping:
Over the period of 1-2 years, an increase in P
aPL
SRAS P2 Y2 P1 Y1
causes an increase in the quantity of g & s supplied.
rGDP

5. Sticky wages

6. Sticky prices

7. Of the three theories, this one seems the least plausible.
Firms certainly have a strong incentive to not mistake a general price increase for a relative price increase. And information about the price level is costless and available with only a short lag (especially the CPI, which is published monthly and very widely reported the moment it comes out).
My remarks here are not officially part of the textbook, so they are not supported in the study guide or test bank. Feel free to ignore them.
Misperceptions

8. Why the Slope of SRAS Matters
LRAS
aPL
ADhi
If AS is vertical, fluctuations in AD do not cause fluctuations in output or employment.
Phi
SRAS
Phi
Yhi
ADlo
Plo
Ylo
If AS slopes up, then shifts in AD do affect output and employment.
AD1
Before introducing the three theories of short-run aggregate supply, it’s worth taking a moment to show students why the slope of SRAS is critically important in the theory of economic fluctuations.
Plo Y1
rGDP

9. Why the SRAS Curve Might Shift
Changes in commodity prices
Changes in nominal wages
Changes in productivity
LRAS
aPL
SRAS
SRAS PE PE
rGDP YN

10. SRAS and LRAS
The imperfections in these theories are temporary. Over time,
sticky wages and prices become flexible
misperceptions are corrected
In the LR,
PE = P
AS curve is vertical

11. Long-Run Aggregate Supply Curve (LRAS)
The natural rate of output (YN) is the amount of output the economy produces when unemployment is at its natural rate.
YN is also called potential output or full-employment output.
LRAS
aPL
The book does not use the notation YN. I use it here to keep the slides from getting too cluttered, and also to make it easier for students to take notes: it’s easier for them to write “YN” than “the natural rate of output.” YN
rGDP

12. Why LRAS Is Vertical
YN depends on the economy’s stocks of labor, capital, and natural resources, and on the level of technology.
An increase in P
LRAS
aPL P2 P1
does not affect any of these, so it does not affect YN.
This is review from the chapter entitled “Production and Growth.” YN
rGDP

13. Why the LRAS Curve Might Shift
LRAS1
LRAS2 YN ’
Any event that changes any of the determinants of YN will shift LRAS.
Example: Immigration increases L, causing YN to rise.
aPL YN
rGDP

14. LRAS Shifts Arising from Changes in L
The Baby Boom generation retires:
L falls, LRAS shifts left
New govt policies reduce the natural rate of unemployment:
the % of the labor force normally employed rises, LRAS shifts right

15. LRAS Shifts Arising from Changes in Physical or Human Capital
Investment in factories or equipment:
K rises, LRAS shifts right
More people get college degrees:
Human capital rises, LRAS shifts right
Earthquakes or hurricanes destroy factories:
K falls, LRAS shifts left

16. LRAS Shifts Arising from Changes in Natural Resources
A change in weather patterns makes farming more difficult:
LRAS shifts left
Discovery of new mineral deposits:
LRAS shifts right
Reduction in supply of imported oil or other resources:
It might be worth mentioning that the change in weather patterns or reduction in imported resources would have to be reasonably long-lasting for the LRAS curve to shift. Short-lived changes are more likely to affect SRAS than LRAS.

17. LRAS Shifts Arising from Changes in Technology
Technological advances allow more output to be produced from a given bundle of inputs:
LRAS shifts right.

18. Using AD & AS to Depict LR Growth and Inflation
LRAS2000
Over the long run, tech. progress shifts LRAS to the right
LRAS1990
aPL
LRAS1980
AD2000
AD1990
P2000
and growth in the money supply shifts AD to the right.
P1990
AD1980
P1980
In the following chapter, it will be more clear why money supply growth shifts the AD curve rightward.
Result: ongoing inflation and growth in output.
Y1980
Y1990
Y2000
rGDP

19. The Long-Run Equilibrium
In the long-run equilibrium,
PE = P,
Y = YN ,
and unemployment is at its natural rate.
LRAS
aPL
SRAS PE AD YN
rGDP