Aggregate Supply Curve

Flashcards about the Aggregate Supply Curve

Aggregate-supply curve

Shows the quantity of goods and services that firms choose to produce and sell at each price level.

Aggregate-supply curve

Upward sloping in the short run and vertical in the long run.

Price Level

The overall level of prices.

Quantity of Output

The economy’s total output of goods and services.

Why is the long run aggregate-supply curve vertical?

Price level does not affect the long-run determinants of GDP; monetary neutrality.

Long-Run Aggregate-Supply Curve

The quantity of output supplied depends on the economy’s quantities of labor, capital, and natural resources and on the technology for turning these inputs into output; it is vertical at the natural rate of output.

Natural rate of output

Production of goods and services that an economy achieves in the long run when unemployment is at its natural rate.

Why is the short-run AS curve upward sloping?

Sticky-wage theory, sticky-price theory, and misperceptions theory.

Sticky-wage theory

Nominal wages are slow to adjust to changing economic conditions due to long-term contracts, slowly changing social norms, and notions of fairness.

Short-Run Aggregate-Supply Curve

A fall in the price level reduces the quantity of output supplied, but this relationship is temporary as wages, prices, and perceptions adjust over time.

What causes the aggregate supply curves to shift?

Changes in labor (L), capital (K), natural resources (NR), and technological knowledge (T).

Changes in labor, L

Quantity and Quality/skills of workers. If L increases, LR & SR AS shift to the right.

Changes in capital, K

Physical capital (buildings, equipment, infrastructure). If K increases, LR & SR AS shift to the right.

Changes in natural resources, NR

Availability of natural resources, new discovery of natural resources, and weather. If NR increases, LR & SR AS shift to the right.

Changes in technology

Ideas & Methods of production, labor and capital improvements. If T increases, LR & SR AS shift to the right.

Can SRAS curve shift without LRAS curve shifting?

Yes, with an unexpected change in input costs such as nominal wages or oil prices (e.g. oil price increases of the 1970s).