What is Short-Run Aggregate Supply?

  • Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

  • As the aggregate price level increases, the aggregate output increases

  • Profit per unit of output = Price per unit of output - Production cost per unit of output

  • As the price level increases, producers are collectively going to produce more goods and services

  • This is all in the short-run

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Nominal Wages and Sticky Wages

  • The largest source of inflexible production cost is wages paid to workers (all forms of compensation)

  • Typically, wages paid to workers are paid as nominal wages and not real wages

    • We think in nominal terms, not in real terms

    • Wages are not necessarily responsive to current economic conditions

    • Wages, therefore, are considered sticky

  • Sticky wages are nominal wages that are slow to fall in unemployment and slow to rise in labor shortages

Shifts in the Aggregate Supply Curve

Aggregate price level (a) Leftward Shift SRAS2 SRASI Decrease in
  Short-Run Aggregate Supply Real GDP Aggregate price level (b)
  Rightward Shift SRASI SRAS2 Increase in Short-Run Aggregate Supply
  Real GDP

  • Changes in Commodity Prices

    • Increase in the price of oil raises production costs and shifts AS to the left

    • Decrease in the price of oil lowers production costs and shifts AS to the right

  • Changes in Nominal Wages

    • A fall in nominal wages shifts the AS to the right

    • An increase in money paid to workers (cost of living increases) shifts the AS to the left

  • Changes in Productivity

    • Technology improvements will cause workers to increase productivity. AS shifts right

    • New worker regulations has the opposite effect. AS shifts to the left

    Factors that Shift the Short-Run Aggregate Supply Curve Changes in
commodity prices If commodity prices fall, If commodity prices rise,
Changes in nominal wages If nominal wages fall, If nominal wages rise,
. Changes in productivity If workers become more productive, . If
workers become less productive, . ... short-run aggregate supply
increases. ... short-run aggregate supply decreases. ... short-run
aggregate supply increases. ... short-run aggregate supply decreases.
... short-run aggregate supply increases. ... short-run aggregate
supply decreases.

Long-Run Aggregate Supply Curve

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  • Shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages were fully flexible

  • Potential output

    • level of real GDP the economy would produce if all prices, including nominal wages adjusted properly
  • What would shift the LRAS?

    • Increases in resources (land, labor, capital)

    • Increases in the quality of resources (more educated workforce)

    • Technological progress

Examples

  • If the aggregate output exceeded potential output, what would happen to the SRAS? What would happen to wages?

    LRAS s2ASz wases aresog polenQial rGDP

  • If the aggregate output fell short of potential output, what would happen to the SRAS? What would happen to wages

    \*sus Isos

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