Unit 3: Aggregate Supply

2/21/17

• Aggregate Supply- Level of real GDP that firms will produce at each price level
• 2 types of aggregate supply

1. Long run- Period of time where input prices are completely flexible and adjust to change in the price level 

 - Vertical line in the middle of the graph= Long run
     2. 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 GDPr supplied directly to the price level

Long Run Aggregate supply
-The LRAS  marks the level of full employment in the economy                                                       

-The LRAS  marks the level of full employment in the economy                                                    

Short Run Aggregate supply              

 -Because the input are sticky the SRAS is are upward slopping

-an increase in SRAS is as a shift to the right

- a decrease in SRAS is seen as a shift to the left.

- The key to understanding shifts in SRAS is id per unit cost cost of production 

- Per unit cost =(total input cost/ total output

Determinants of SRAS 

• Input prices

- domestic resource prices

- wages (75% of all business costs)

-cost of capital 

-raw materials (commodity prices)

* Foreign resource prices 

-Strong $= lower foreign resource

-weak $= higher foreign resource 

*Market Power 

-Monopolies and cartels that control resources control the price of those resources

- increase in resource prices= decrease in SRAS 

- decrease in resource prices = increase in SRAS

• Productivity

- Productivity= total output/ total inputs

- More productivity = lower unit production 

- lower productivity = higher unit production 

• Legal Institutional Environment

- Taxes and subsidies 

- taxes on businesses increase per unit production

-subsidies to businesses reduce per unit costs 

-Government regulation 

- Government regulation creates a cost of compliance 

-deregulation reduces compliance cost