February 21, 2017

Aggregate Supply

Aggregate Supply: The level of real GDP that firms will produce at each price level

• Long-Run: Period of time where input prices are completely flexible and adjust to changes in the price level
• The level of real GDP supplied is independent to the price level
• Short-Run: Period of time where input prices are sticky and do not adjust to changes in the price level
• The level of real GDP supplied is directly related to the price level

Long-Run Aggregate Supply (LRAS)

• Marks the level of full employment in the economy (analogous to PPC)

Short-Run Aggregate Supply (SRAS)

• Input prices are sticky and do not adjust to changes in the price level
• Level of real GDP supplied is directly related to the price level
• Upward Sloping
• Increase ---->
• Decrease <----

Per-Unit Production Cost

Total Input Cost/Total Output Cost

Determinants of SRAS

1. Input Prices

• Domestic resource prices 
• Wages (75% of all business costs)
• Cost of Capital
• Raw Materials (Commodity Prices)
• Foreign Resource Prices
• Stronger $= lower foreign price
• Weaker $= higher foreign price
• Market Power 
• Monopolies/Cartels that control resources
• Control price

2. Productivity

3. Legal Institutional Government 

• Taxes and subsidies
• Taxes ($ to government) on business increase pre unit of production cost= SRAS <----
• Subsidies ($ to government) to business reduce per unit production cost= SRAS ---->
• Government Regulation
• Creates a cost of compliance= SRAS <----
• Deregulation reduces compliance cost= SRAS ---->