3.3 Short Run Supply

Short Run

• refers to the period of time in which at least one input price is fixed

• is NOT a specific amount of time

• is just however long it takes for input costs to catch up to changes in price level

Input Costs

cost for the use of the factors of production

Ways Firms “fix” input prices for periods of time

1. contracts for employees

2. leases for retail spaces

3. mutual agreements for commodity prices

Sticky

when input price changes lag behind price level changes, those are referred to as ___, meaning slow to adjust

(ex. __ wages)

Short-Run Aggregate Supply

• in short run, an increase in overall price level in economy tends to raise the quantity of goods and services supplied and vice versa

Sticky Wage Theory

Nominal wages and input costs are slow to adjust in the short run:

• wages do not adjust immediately to a fall in price level. A lower price level makes employment and production less profitable, so they produce less.

Trade-Off between Inflation and Unemployment

(movement along SRAS curve)

Price Level inc. (inflation inc) → RGDP inc. → UR dec.

Price Level dec. (inflation dec) → RGDP dec. → UR inc.

• Unemployment and Real GDP are ALWAYS opposite.

  • more GDP = more employment

SRAS Shifters

Anything that makes it cheaper or more expensive to produce

1. Input Costs

   • Labor/wages

   • Resource costs

2. Productivity

   • technology

3. Government Policy

   • Deregulation and subsidies

   • taxes

4. Expectations

   • higher prices in the future? Less SRAS now!