1. A Little Economics Joke…

2. Extending the Analysis of Aggregate Supply
Chapter 35

3. From Short Run to Long Run
Short-run is the time period in which nominal wages (and other inputs) don’t respond to price-level changes
In other words, just because prices went up, doesn’t mean your paycheck went up (yet)
This concept is actually referred to as sticky wages because your wages are slow to rise despite other things in the economy rising.
Long-run is when wages are fully responsive to previous changes in price level
Your paycheck goes up because the price level increased a year ago – unless you teach in Lake Co.

4. Demand-Pull Inflation
When demand increases beyond the point of LRAS it will cause inflation—this is known as demand-pull inflation
Notice that AD shifted right, but eventually that causes AS to shift left, resulting in output equalizing out, but prices being higher (inflation)

5. Cost-Push Inflation
Cost-push inflation occurs when the cost of production forces businesses to increase the price they sell goods and services for
If they try to move right, they will end up having to move back left to be in sync with the LRAS

6. Cost-Push Inflation
Why would they increase production when they know that it will result in inflation?
If things cost more to make then you need to make more of them to continue making a profit.
Example, if labor goes up and workers still make the same number of shoes, the business will lose money
The end result however is that in the LONG run AD will shift left along the curve. The business will still make a profit because prices went up

7. Aggregate Supply Shocks
When a large, sudden increase in resource costs pushes the economy’s SRAS leftward
When OPEC quadrupled their oil prices in the 70s, it jumped the cost of everything up
This caused an increase in price and a decrease in output which also equals increased inflation and increased unemployment
That combination is also known as stagflation

8. The Inflation-Unemployment Relationship
Since low unemployment and low inflation are economic goals it is necessary to look at their relationship
There are three generalizations that can be made:
Normally, there is a trade-off between inflation and the unemployment rate
AS shocks can cause both higher unemployment and higher inflation
There is no significant trade-off between the two in the long run

9. The Phillips Curve
Lower unemployment has in inverse relation with inflation (and vice versa)
This causes a downward sloping line or a concave line
The Long Run Phillips Curve (LRPC) shows that in the LONG run unemployment will have a natural rate at which it exists - p 727
LRPC
Inflation Rate % PC
Unemployment Rate %

10. Supply Side Economics
They say that government policies can either impede or assist economic growth
If taxes are high, the incentive to work, save and invest are lessened
To promote growth, lower taxes are needed
This is evidenced by the Laffer Curve - p 731