Unit 3 - Aggregate Supply

• The level of Real GDP (GDPR) that firms will produce at each price level (PL)
• Long Run vs. Short Run
• Long-Run Aggregate Supply (LRAS)
• 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 is independent of the price-level
• marks the level of full employment in the economy (analogous to PL)
• Short-Run Aggregate Supply (SRAS)
• period of time where input prices are sticky and do not adjust to changes in the price level
• the level of Real GDP supplied is directly related to the price level
• because input prices are sticky in the short run, the SRAS is upward sloping
• Changes in SRAS
• an increase in SRAS is seen as a shift to the right
• a decrease in SRAS is seen as a shift to the left
• the key to understanding shifts in SRAS is per unit cost of production
• per-unit production cost = (total input cost) / (total output cost)

• Determinants of SRAS:
• Input Prices
• domestic resource prices
• wages (75% of business costs)
• costs of capital
• raw materials (commodity prices)
• foreign resource prices
• strong $ = lower foreign resource prices
• weak $ = higher foreign resource prices
• market power
• monopolies and cartels that control resources control the price of those resources
• increases in resource prices = SRAS ←
• decreases in resource prices = SRAS →
• Productivity
• productivity = (total outputs) / (total inputs)
• more productivity = lower unit production cost = SRAS →
• lower productivity = higher unit production cost = SRAS ←
• Legal-Institutional Environment
• taxes and subsidies
• taxes ($ to government) on business increase per unit production cost = SRAS ←
• subsidies ($ from government) to business reduce per unit production cost = SRAS →
• government regulation
• government regulation creates a cost of compliance = SRAS ←
• deregulation reduces compliance costs = SRAS →