Unit 3; Day 2- Aggregate Supply

Aggregate Supply- Level of Real GDP that firms produce at price level

Long-Run- Period of time where input prices are completely flexible; adjust to changes in price level. Level of real gdp supplied is independent price level.

Short-Run- Period of time where input prices are sticky; do not adjust to changes in price level. Level of real gdp supplied directly related to price level

Long Run Aggregate Supply(LRAS)- marks level of full employment in economy (analogous to PPC)
Because input prices are completely flexible, changes in price level do not change firms’ real profits and therefore do not change firms’ level of output. This means that LRAS is vertical at economy’s lvl of employment.

Short Run Aggregate Supply(SRAS)- increase in SRAS= shift to right. ->; Decrease in SRAS is seen as shift to the left. SRAS<-
Key unit to understanding shifts is per unit cost of produc. = total input cost (input*price per unit)/ total output

Things that affect SRAS
Input Prices-
Domestic resource prices-
Wages(75% business costs)
cost ofcapital
raw materials(commodity prices)
Foreign resource prices-
Strong$= lower foreign resources prices
                Weak$= Higher foreign resource prices
Market power
Increases in resource prices= SRAS<-
Decrease in resource prices= SRAS->
Productivity= Total output/ total input
More productivity= lower unit produc. cost= SRAS>
Lower productivity= higher unit produc. cost= SRAS<
Taxes and Subsidies
Taxes($ to govt) on business increase per unit produc. cost= SRAS<
Subsidies($ from gov) to business reduce produc. cost= SRAS>
Government regulation
Govt regulation creates cost compliance= SRAS<
Deregulation reduces compliance costs= SRAS>
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Full Employment
Equilibrium exists where AD intersects SRAS and LRAS at same point.
Recessionary Gap
Exists when equilibrium occurs below full employment output.
Inflationary Gap
Exists when equilibrium occurs beyond full employment output
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Nominal wages- Amount of money received by a worker per unit of Time
Real Wage- amount of goods and services a worker can purchase with their nominal wages. In essence, real wage is the purchasing power of nominal

Sticky wage- Amount set based on initial price level and does not vary due to labor contracts or other restrictions.