Aggregate Supply

February 19, 2016

Aggregate supply

·             The level of Real GDP (GDPr) that firms will produce at each price level (PL)

Long-run V. short-run

·             Long-run

-period of time where input prices are completely flexible and adjust to changes in the price level

-In the long-run the level of real GDP supplied independent of the price-level

·             Short-run

-period of time where input prices are sticky and not adjust to change in the price level

-In the short-run, the level of real GDP supplied is directly related to the price level.

Long-run aggregate supply (LRAS)

·             The long-run aggregate supply or LRAS marks the level of full employment in the economy (analogous to PPC)

Because input prices are completely flexible in the long-run, changes in price do not change firms real profits and therefore do not change firms level of output. LRAS is vertical at economy’s level of full employment

Changes in SRAS

·             Increase in SRAS is seen as a right shift

·             Decrease in SRAS is to the left

·             SRAS is per unit cost of production

·             Per-unit production cost= total input cost/ total output