Aggregate Supply Short Run Long

Aggregate Supply: Short – Run & Long – Run 1

Short-run Aggregate Supply (AS) shows the quantity of real GDP produced at different price levels. l Short-run AS slopes upward l a higher price level (holding production costs and capital constant in the short-run) à higher profit margins à firms want to produce more. – 2

Short – Run Aggregate Supply: Constant Returns 3

Shape of Short-run AS (SRAS) l In the short-run, the capital stock can’t change. – – the number of factories and machines is constant increasing labor input increases output … but at a diminishing rate • l More and more workers are sharing the same capital stock Diminishing returns an ever-steeper SRAS curve. 4

Short – Run Aggregate Supply: Diminishing Returns 5

The Shape of Long-run AS (LRAS) l Resource costs are NOT fixed in the long-run. – l The amount of capital is NOT fixed in the longrun – l As prices rises, workers demand get higher wages Profits don’t rise with price firms can build new plants and buy new equipment over the long-run. AS is set by production possibilities in the longrun – – LRAS is not affected by prices LRAS is vertical: higher prices cannot elicit more output in the long-run. 6

Long-Run Aggregate Supply: Potential Real GDP 7

Determinants of Aggregate Supply 8

Determinants of Aggregate Supply 9

Determinants of Aggregate Supply 10

Shifting the Long. Run Aggregate Supply Curve Growth occurs as the labor force and capital stock grow and as technological innovation improves production efficiency. 11

Changes in Short-Run Aggregate Supply 12

Effects of a Change in Aggregate Supply Cost-push inflation: cost increases push AS to the left causing price level increases (inflation). 13

Aggregate Demand Aggregate Supply Equilibrium 14

Aggregate Demand Supply Equilibrium: Short-run and long-run responses to increase in aggregate demand 15

Economic Insight: OPEC and a decrease in aggregate supply 16