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Aggregate Supply: Short – Run & Long – RunAggregate Supply: Short – Run & Long – Run

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Short-run Aggregate SupplyShort-run Aggregate Supply

Aggregate Supply (AS) shows the quantity of real GDP produced at different price levels.

Short-run AS slopes upward – a higher price level (holding production costs

and capital constant in the short-run) higher profit margins firms want to produce more.

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Short – Run Short – Run Aggregate Aggregate Supply: Supply: Constant Constant ReturnsReturns

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Shape of Short-run AS (SRAS)Shape of Short-run AS (SRAS) In the short-run, the capital stock can’t

change.– the number of factories and machines is

constant– increasing labor input increases output …

but at a diminishing rate• More and more workers are sharing the same

capital stock

Diminishing returns an ever-steeper SRAS curve.

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Short – Run Short – Run Aggregate Aggregate Supply: Supply: Diminishing Diminishing ReturnsReturns

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The Shape of Long-run AS (LRAS)The Shape of Long-run AS (LRAS)

Resource costs are NOT fixed in the long-run.– As prices rises, workers demand and get higher wages

Profits don’t rise with price The amount of capital is NOT fixed in the long-

run– firms can build new plants and buy new equipment

over the long-run. AS is set by production possibilities in the long-

run– LRAS is not affected by prices– LRAS is vertical: higher prices cannot elicit more

output in the long-run.

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Long-Run Long-Run Aggregate Aggregate Supply: Supply: Potential Potential Real GDPReal GDP

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Determinants of Aggregate SupplyDeterminants of Aggregate Supply

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Determinants of Aggregate SupplyDeterminants of Aggregate Supply

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Determinants of Aggregate SupplyDeterminants of Aggregate Supply

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Shifting the Long-Shifting the Long-Run Aggregate Run Aggregate Supply CurveSupply Curve

Growth occurs as the labor force and capital stock grow and as technological innovation improves production efficiency.

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Changes in Changes in Short-Run Short-Run Aggregate Aggregate SupplySupply

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Effects of a Effects of a Change in Change in Aggregate Aggregate SupplySupply

Cost-push inflation: cost increases push AS to the left causing price level increases (inflation).

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Aggregate Aggregate Demand - Demand - Aggregate Aggregate Supply Supply EquilibriumEquilibrium

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Aggregate Aggregate Demand and Demand and Supply Supply EquilibriumEquilibrium: : Short-run and Short-run and long-run long-run responses to responses to increase in increase in aggregate aggregate demanddemand

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Economic Economic Insight: Insight: OPEC and OPEC and a decrease a decrease in in aggregate aggregate supplysupply