Aggregate Supply

Aggregate Supply (AS)→the level of RGDP (GDPr) that firms will produce at each PL

Long-Run v. Short-Run: 

Long-Run (LRAS)	Short-Run (SRAS)
Prd of time where input prices are completely flexible and adjust to changes in PL            Level of RGDP supplied is independent of PL	Prd of time where input prices are sticky and do not adjust to change in PL           Level of RGDP supplied directly related to PL

LRAS→marks level of FE in economy (analogous to PPC) **always vertical at FE

• deals w/ potential output (are we using all resources efficiently?)
• why LRAS shifts: tech., capital resources, growth, entrepreneurship, resources available

SRAS
-△ in SRAS

• increase=shift → (input prices ↓, productivity ↑, +/or deregulation)
• decrease=shift ← (input prices ↑, productivity ↓, +/or deregulation)

-key to understanding shifts in *per unit of production=total input cost/total output

-determinants of SRAS (all of the following affect unit prod. cost)

• input prices (factors of prod., machinery)
• productivity (tech.)
• legal-institutional environment

-increases in resource prices=SRAS ←

-decreases in resource prices=SRAS →

Productivity

-Productivity=total output/total inputs

-more productivity=lower unit of prod. cost=SRAS →

-lower prod.=higher unit of prod. cost=SRAS ←

Ranges/Shapes/Views of AS (Three Schools of Economics)

1. Keynesian Range:

• believe in ↔ curve b/c when economy is below FE, AD shifts outward (↑ in RGDP, unemployment drops, PL is constant) meaning demand creates its own supply
• PL constant=recession
• loss of unemployed resources

2. Intermediate Range:

• AS is b/t Keynesian and Classical Range
• when this occurs, both GDP and PL increases

3. Classical Range:

• in long-run, AS curve is vertical b/c only effects of an ↑ in AD occur at FE, thus, supply creates its own demand (Say's Law)

AS/AD Model: equilibrium of AS and AD determines current output (GDPr) and PL

FE: equilibrium exists where AD intersects SRAS and LRAS at the same point

Recessionary Gap: exists when equilibrium occurs below FE output

Inflationary Gap: exists when equilibrium occurs beyond FE output