Aggregate Supply

aggregate supply curve


Aggregate supply long run VS short run

• the level of real GDP ( GDPr) that firms will produce at each price level ( PL) 

long run: period of time where input prices are completely flexible and adjust to changes in the price level

- in the long run, the level of real GDP supplied is independent of the price level

short run: period of time where input prices are sticky and do not adjust to the changes in the price level

- in the short run, the level of real GDP supplied is directly related to the price level

Long run aggregate supply ( LRAS) 

• the long run aggregate supply or the LRAS marks the level of full employment in the economy ( analogous to the PPC) 

Short run aggregate supply (SRAS) 

• because input prices are sticky in the short run, the SRAS is upward slopping
• an increase in SRAS is seen as a shift to the right
• a decrease in SRAS is seen as a shift to the left

Formula -> Total input cost/ total output

determinants of SRAS

• 1. Input Prices

Wages
Cost of Capital
Raw Materials

• Foreign Resource Prices

Market Power
Monopolies and cartels that control resources control the price of those resources.
Increase in Resource Prices = SRAS <----
Decrease in Resource Prices = SRAS ---->

• 2. Productivity = Total Outputs / Total Inputs

More Productivity = Lower unit production cost = SRAS ---->

• 3. Legal-Institutionoal Environment= Taxes and Subsidies, Taxes on Business

Government regulation creates a cost of compliance = SRAS <----
Deregulation of resources compliance costs = SRAS --->