Week 7(Aggregate Supply - SR vs LR)

Aggregate Supply

Relationship between real GDP supplied and price level.

AS-AD Model

Imaginary market model for total final goods and services that make up real GDP

Short Run Aggregate Supply

Represents the total amount of goods and services firms are willing and able to produce at different price levels, assuming some factors like wages are fixed, typically within a year or less

Long Run Aggregate Supply

Represents an economy's potential output, depicted as a vertical line on a graph, and is determined by factors like capital, labor, and technology, not price levels

Potential GDP

Real GDP at full employment level.

Short Run AS Curve

Upward sloping due to sticky wages.

Long Run AS Curve

Vertical line at potential GDP level.

Profit Equation

Profits = Revenue - Costs.

Price Level

Average of current prices in the economy.

Real GDP

Total value of goods produced, adjusted for inflation.

Demand Curve Shift

Change in AD due to consumption, investment, or government.

Wealth Effect

When price level rises, the value of savings does not rise with it, and wages are sticky, leading to decreased real wealth and lower consumption.

Substitution Effect

a rise in price level decreases real value of money, leading to higher interest rates that discourage borrowing for investment.

Disposable Income

Income available after taxes and transfers.

Consumption Function

Consumption depends on wealth and current income.

Investment (I)

Expenditure on capital goods for future production.

Government Expenditure (G)

Total government spending on goods and services.

Exports (X)

Goods sold to foreign markets.

Imports (M)

Goods purchased from foreign markets.

Aggregate Demand

Relationship between real GDP demanded and price level.

AD Curve

Downward sloping due to wealth and substitution effects.

Supply Shocks

Events causing shifts in the SRAS curve.

Factors Affecting Potential GDP

Labor, capital, and technological advancements.

Marginal Cost

Cost of producing one additional unit.

Price of Labor

Wage rate, key input in production.

Movement along demand curve

Price level change