Aggregate Supply: Introduction and Determinants - Section 4, Module 18

  • Aggregate supply curve - shows the relationship between the economy’s aggregate price level and aggregate output producers are willing to supply

  • positive relationship in the short run btwn aggregate price level and aggregate output supplied

    • why:

    • Profit per unit output:

    • producing output is profitable if price received > production cost

    • many of the costs producers face are fixed and can’t be changed FOR EXTENDED PERIODS OF TIME

      • WAGES‼‼‼‼‼‼ - all forms of worker compensation (including employer-paid health care and retirement benefits + earnings)

      • nominal wage - dollar amounf of any wage paid → often determined by contracts signed in the past → unchangeable for long periods of time

        • even if no formal contracts, there are still informal agreements = if not followed then labor unions revolt, etc

        • sticky wages - nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

          • not sticky forever

  • short run aggregate supply curve - the positive relationship between the aggregate price level and the quantity of aggregate output producers are willing to supply during the time period when many production costs are inflexible (+ relation = upward slope)

  • Shifters in SRAS:

  • In the long run, nominal wages are flexible - aggregate price level has no affect on quantity of aggregate output supplied

    • because cost of production and price the good is being sold at would change proportionally → happens bc of inflation/deflation

    • long run aggregate supply curve - shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices were fully flexible

    • COMPLETELY VERTICAL

    • potential output - where the LRAS touches the horizontal axis

      • full employment output level - GDP the economy can attain with full employment of all its resources

    • shifters of LRAS - increase in quantity/quality of resources and technology - same as PPC shifters

    • SRAS always eventually to be at LRAS