Notes (2/12/15) - AGGREGATE SUPPLY

• The level of real GDP (GDPR) that firms will produce at each price level (PL)
• Long Run v. Short Run
  • Long Run: time where input prices are flexible and adjust to change in price level
  • level GDP supplied is independent of the price level
  • Short Run: time where input prices are sticky and don't adjust to change in price level
  • level of GDP supplied is directly related to price level

Long Run Aggregate Supple (LRAS)

• marks level of full employment in the economy (analogous to PPC)
• because input is completely flexible in the long run, changes in price level do not change firms real profits and therefore do not change firms' level of of output
• LRAS is vertical at the economy's level of full employment

Short Run Aggregate Supply (SRAS)

• because input prices are sticky in the short-run, the SRAS is upward sloping

• changes in SRAS
• increases in SRAS is seen as shift to right
• decreases in SRAS is seen as shift to left
• key to understanding shifts is per unit cost of production
• per-unit cost of production = total input cost / total output

Determinants of SRAS

• input prices
• productivity
• legal institution environment

Input Prices

• domestic resource prices
• wages (75% of all business prices)
• cost of capital
• raw materials (commodity prices)
• foreign resource power
• Strong money = low foreign resource prices
• Weak money = high foreign resource prices
• market power
• monopolies and cartel that control resources and control prices of those resources
• increase in resource price = SRAS shift left
• decrease in resource prices = SRAS shift right

Productivity

• total output/total inputs
• more productivity = low unit production cost (AS shift right)
• less productivity = high unit production cost (AS shift left)

Legal Institution Environment

• Taxes and subsidies
• taxes ($ to the govt.) on business increase per-unit production cost (AS shift left)
• subsidies ($ from the govt.) to business reduce per-unit production cost (AS shift right)
• Government regulation
• government regulation creates a cost of compliance (AS shift left)
• deregulation reduces compliance cost (AS shift right)