Econ 102 - Chapt20:Feb 10(not on midterm)

Econ 102: Feb 10 Notes

Long Run Aggregate Supply (LRAS)

• In the long run, the price level does not influence supply. Factors like labor, technology, and other variables affect long-run supply.

• LRAS is represented as a vertical line, indicating no effect of price level changes on production in the long run.

Short Run Aggregate Supply (SRAS)

• Short Term Supply: Defined for periods less than 1-2 years, showing the relationship between real GDP and price levels with constant nominal wages.

• If nominal wages and prices change at the same rate, real wages remain unchanged, and production levels stabilize.

Dynamics of Real Wages and Labor Demand:

• If fixed nominal wage (W) faces price level (P) increase, real wage (W/P) falls.

• A decrease in real wage boosts labor demand as firms need more labor to maintain output, leading to increased output.

Causes of Shifting SRAS Curve:

• Potential Output: Changes in potential GDP shift both LRAS and SRAS, influenced by:

  • Increases in labor force.

  • Increases in capital stock.

  • Technological advancements.

• An increase in LRAS also raises SRAS.

• Nominal Wages: Changes in nominal wage affect only SRAS with constant price index. If nominal wage increases while the price index remains constant, the real wage rises.

Aggregate Demand (AD)

• Definition: Total demand for all goods and services in the economy from households, firms, governments, and foreign entities.

• Price-Demand Relationship: Inverse relationship; as price levels rise, demand in the economy decreases.

• Factors Influencing Aggregate Demand: Price levels, expectations, government policy, and global economic conditions.