Thursday, March 3, 2016

(2-18-16)Unit III Aggregate supply

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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