Shortrun Aggregate Supply SRAS SRAS shows the relationship between the economys aggregate price level and the total quantity of final goods and services aggregate output or RGDP producers are willing to supply ID: 1014292
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1. Aggregate Supply in the Short and Long Run
2. Short-run Aggregate Supply (SRAS)SRAS shows the relationship between the economy’s aggregate price level and the total quantity of final goods and services (aggregate output or RGDP) producers are willing to supply.There is a positive relationship between price level and aggregate output (RGDP)A higher price level translates into a higher profit per unit of outputProfit per unit of output is found by subtracting cost per unit from price per unit
3. oAS1P1P2Q1Q2a1a2A higher price level increases profits and output moving the economy from a1 to a2Price LevelReal domestic outputSHORT-RUN AGGREGATE SUPPLY
4. oAS1P1P2Q1Q2a1a2A lower price level decreases profits and output moving the economy from a1 to a3Price LevelReal domestic outputSHORT-RUN AGGREGATE SUPPLYP3Q3a3
5. Short-Run Aggregate SupplyIn the short run production costs for a producer do not changeSticky wages: because wages do not rise as rapidly as price levels, producers receive extra profit in the short run and therefore produce more.In the long run production costs do change. These changes result in a shift of the Aggregate Supply (AS) curve
6. Changes (shifts) in Short Run AS AS changes (shifts) when per unit production costs change for reasons other than a change in output. If costs increase then AS shifts left. If costs decrease AS shifts rightThere are three determinants of AS. Commodity pricesDomestic resourcesforeign resources (oil / exchange rates)
7. Changes in Short Run AS Nominal WagesNominal wages are fixed in the short-run, but as time passes wage contracts are renegotiated to account for increases in inflationAn increase in wages increases per unit production costs and shifts AS leftwardProductivity*Technology *Productivity is measured by real output divided by input. An increase in productivity lowers per unit production costs and the shifts the curve rightward.
8. AGGREGATE SUPPLY in theSHORT-RUN AND LONG-RUNPeriod in which nominal wages (and other input prices) remain fixed as the price level increases or decreasesShort Run -Period in which nominal wages and other input prices are fully responsive to previous changes in the price levelLong Run -
9. oAS1P1P2Q1Q2a2a1AS2b1Price LevelReal domestic outputSHORT RUN TO LONG RUN AGGREGATE SUPPLYA higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left
10. oP3Q3AS1P1P2Q1Q2a2a3a1AS2b1AS3c1ASLRPrice LevelReal domestic outputSHORT RUN TO LONG RUN AGGREGATE SUPPLYA lower price level results reduces nominal wages and shifts the short-run aggregate supply to the right
11. The Long-Run Aggregate Supply CurveIn 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. To illustrate this point the long-run AS is vertical.
12. The Long-Run Aggregate- Supply Curve...Quantity ofOutputNatural rateof outputPrice Level0Long-runaggregatesupplyP1P2 2. …does not affect the quantity of goods and services supplied in the long run.1. A change in the price level…
13. LRAS and the Production Possibilities CurveThe Long Run AS curve and the production possibilities curve represent the same thing: what is this economy capable of producing when fully employing all available resources and technology.They both can also illustrate that we may be operating in the short-run above or below our full-employment level.An economy is operating at the full employment level only if it is on the PPC or if AD/AS intersects on the LRAS.
14. Short run Equilibrium Above and Below Full EmploymentPrice LevelSRASRGDPLRASFEQ2PL2PL1PL3Q3
15. Why the Short-run Aggregate Supply Curve Might ShiftShifts 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.
16. 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 they tend to set wages low. This shifts the short-run aggregate supply curve to the right.These shifts bring short-run changes in output back to the long-run level.Short Run to Long Run Aggregate Supply