Aggregate Supply
The level of new GDP that firms ill produce at each price level
Long run v. Short run
Long run:
Period of time where inputs prices are completely flexible and adjust to changes in the price level
In the long run, the level of real GDP supplied is independent of the price level
Short run:
Period of time where input prices are sticky and do not adjust to changes in the price level
In the short run, the level of Real GDP supplied is directly related to the price level
Long Run Aggregate Supply
The long run Aggregate supply of LRAS marks the level of full employment in the economy
Short Run Aggregate Supply
Because input prices are sticky in the short run, the SRAS is upward sloping
Changes in SRAS
An increase in SRAS is seen as a shift to the right to the right
A decrease in SRAS is seen as a shift to the left. SRAS to the left
The key to understanding shifts in SRAS is per unit cost production
PER- UNIT production cost
Determinants of SRAS ( all of the following affect unit production cost)
Input prices
Domestic resource Price
Wages (75% of all business cost)
Cost of Capital
Raw material (commodity)
Foreign Resource Prices
Strong $= lower foreign resources prices
Weak $= higher foreign resources prices
Market Power
Monopolies and cartels that control resources control the price of those resources
Increase in Resource Prices = SRAS to the left
Decrease in Resource price = SRAS to the right
Productivity
Total output / total inputs
More productivity = Lower unit production cost= SRAS to the right
Lower productivity = higher unit production cost = SRAS to the left
Legal- Institution Environment
Taxes and Subsides
Taxes on business increase per Unit production cost= SRAS to the left
Subsidies to business reduce per unit production cost = SRAS to the right
Government Regulation
Government regulation creates a cost of compliance= SRAS to the left
Deregulation reduces compliance cost = SRAS to the right
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