Aggregate Supply
Aggregate Supply
-The Level of Real GDP (GDPr) that firms will produce at each Price Level (PL)
Long-Run AS(LRAS)-Period at which input $ is flexible & adjust to changes in PL- Real GDP is independent to PL
Short-Run AS(SRAS)-Input Price rigid; do not adjust- Real GDP related to PL
LRAS-shows full employment(analogous to PPC); verticale at full employment
(Note:This graph also shows changes in AD please ignore it)
Changes in SRAS
-Increase is represented as shift to the right
-Decrease is represented as shift to the left
-Changes are based upon the cost of production per unit (Total Input cost / Total Output)
Determinants
Input Prices- Domestic Resource $ [75% on Wages, Capital cost, and Raw Materials]
-Foreign Resource $
-Market Power- Increase=left Decrease=Right
Productivity-(Total Output / Total Input)
-More= lower unit prod. $ = SRAS shift rightward
-Less = Higher unit prod. $ = SRAS shifts lefward
Legal Institution Environment
-Taxes & Subsidies:
Taxes= shifts SRAS leftward
Subsidies= shifts SRAS rightward
Government Regulation
Regulation = more compliance = SRAS shifting left
Deregulation = less compliance costs = SRAS shifting right
-FE equilibrium occurs when AD crosses SRAS & LRAS @ the same point
Recessionary Gap-
Occurs when equilibrium is below FE output
Inflationary Gap-
When equilibrium is above FE output
:SRAS
Nominal Wages- Amount of $ received by a worker per unit of time
Real Wages- Amount of goods & services a worker can buy with nominal wages
Sticky Wages- Set Nominal Wages from initial price levels: Doesn't vary because of labor contracts, etc.
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