Aggregate SupplyAggregate Supply

Chapter 11 — one weekChapter 11 — one week

DefinitionDefinition

AS is a schedule showing level of AS is a schedule showing level of real domestic output available at real domestic output available at each possible price level.each possible price level.

Possible Shapes of Aggregate Possible Shapes of Aggregate Short Run Supply CurveShort Run Supply Curve

Horizontal SRAS CurveHorizontal SRAS Curve

PL

SRAS

GDPr

HorizontalHorizontal

Conditions:Conditions: Substantial unemployment and excess Substantial unemployment and excess

capacity (unemployed resources)capacity (unemployed resources) Economy is far below full employmentEconomy is far below full employment Might be in a recession or depressionMight be in a recession or depression

Upwardsloping or Intermediate Upwardsloping or Intermediate Range SRAS CurveRange SRAS Curve

PLSRAS

GDPr

Upsloping or Intermediate RangeUpsloping or Intermediate Range

ConditionsConditions Closer to full-employment levels, which Closer to full-employment levels, which

create upward pressure on pricescreate upward pressure on prices Upward pressure on prices is caused by Upward pressure on prices is caused by

rising costs of doing businessrising costs of doing business

Vertical Range SRAS CurveVertical Range SRAS Curve

PL

SRAS

GDPr

Vertical Range SRAS CurveVertical Range SRAS Curve

Conditions:Conditions: Absolute capacity is assumed—the Absolute capacity is assumed—the

economy is unable to produce any more G economy is unable to produce any more G & S for a long period of time& S for a long period of time

Any attempt to increase output will bid up Any attempt to increase output will bid up resource and product pricesresource and product prices

Putting it togetherPutting it together

PL

GDPr

SRAS

AB

C

A = horizontalB = upslopingC = vertical

Determinants of ASDeterminants of AS

1. Change in input prices:1. Change in input prices: Availability of resources (4 factors)Availability of resources (4 factors) Prices of imported resourcesPrices of imported resources Market power of certain industriesMarket power of certain industries

Determinants of AS cont.Determinants of AS cont.

2. Change in productivity can cause 2. Change in productivity can cause changes in per-unit production costchanges in per-unit production cost Productivity rises, unit production costs will Productivity rises, unit production costs will

• Shift to the right and lower pricesShift to the right and lower prices Productivity falls, unit production cost will Productivity falls, unit production cost will

• Shift to the left and increase pricesShift to the left and increase prices

Determinates of AS cont.Determinates of AS cont.

3. Change in legal-institutional 3. Change in legal-institutional environment:environment: Business taxes and or subsidiesBusiness taxes and or subsidies Cost of gov’t regulationCost of gov’t regulation

Change in SRAS? Change in SRAS? or NC or NCDeterminate?Determinate?

1. unions grow more aggressive; wage rates 1. unions grow more aggressive; wage rates increaseincrease

2. labor productivity increases dramatically2. labor productivity increases dramatically 3. OPEC successfully increases oil prices3. OPEC successfully increases oil prices 4. computer technology brings new efficiency to 4. computer technology brings new efficiency to

industryindustry 5. Gov’t spending increases5. Gov’t spending increases 6. giant natural gas discovery decreases energy 6. giant natural gas discovery decreases energy

pricesprices 7. low birth rate will decrease the labor force in 7. low birth rate will decrease the labor force in

the future.the future.

Change in SRAS? Change in SRAS? or NC or NC

1. unions grow more aggressive; wage rates increase 1. unions grow more aggressive; wage rates increase or shift to the left—change in input pricesor shift to the left—change in input prices

2. labor productivity increases dramatically2. labor productivity increases dramatically or shift to the right—change in productivityor shift to the right—change in productivity

3. OPEC successfully increases oil prices3. OPEC successfully increases oil prices or shift to the left—change in input pricesor shift to the left—change in input prices

4. computer technology brings new efficiency to industry4. computer technology brings new efficiency to industry or shift to the right—change in productivityor shift to the right—change in productivity

5. Gov’t spending increases5. Gov’t spending increases NC—gov’t spending would shift the AD curve. NC—gov’t spending would shift the AD curve.

6. giant natural gas discovery decreases 6. giant natural gas discovery decreases energy pricesenergy prices or shift to the right—change in input pricesor shift to the right—change in input prices

7. low birth rate will decrease the labor 7. low birth rate will decrease the labor force in the future.force in the future. NC—will not affect aggregate supply for 16 NC—will not affect aggregate supply for 16

years or moreyears or more

HomeworkHomework

Page 222Page 222 Numbers 1, 2, and 7Numbers 1, 2, and 7

Long Run Aggregate SupplyLong Run Aggregate Supply

PL

Output or GDPr

LRAS

Represents the Q of g & s a nation can Represents the Q of g & s a nation can produce over a sustained period of time produce over a sustained period of time using its productive resources efficientlyusing its productive resources efficiently

LRAS is at full employmentLRAS is at full employment Developing more & better resources or Developing more & better resources or

improving tech. will shift the curve outward improving tech. will shift the curve outward but it will still be verticalbut it will still be vertical