Aggregate Supply

Long run vs. Short run

• Long run: period of time where imput prices are flexible and adjust to changes in price level
• The level of real GDP supplied is independent of the price level
• (Vertical at full employment)
• SHORT RUN: (goes to the sky)
• period of time where input prices are sticky and do not adjust to changes in price level
• level of real GDP supplied is directly related to price level

Changes in Short Run Aggregate Supply

• An inc in SRS is seen as a shift rk the right. SRAS →
• A Decrease in SRAS is seen as a shift to the left. SRAS ←
• The key to understanding shifts SRAS is per unit cost of production
• Per unit cost of production=total input cost/total output

Determinants of SRS

Input Prices:

• deals with wages (75 percent) & raw materials, foreign resource prices (ex: strong $ = lower foreign resource price), and marker power (ex: monopoly)
•  increase in resource Prices=SRAS decrease ←
•  decrease in resources prices = SRAS inc →

Productivity

• Productivity=total output/total input
• more productivity = lower unit production cost = SRAS →
• Lower productivity = higher unit production cost = SRAS ←

Legal-Institutional Environment

• Taxes & Subsidies
• Taxes ($ to gov't) on business increase per unit production cost = SRAS ←
• Subsidies ($ from Gov't) to business reduce per unit production cost=SRAS →
• Gov't Regulations
• Gov't Regulations creates a cost of compliance = SRAS ←
• Deregulation reduces compliance cost = SRAS →

Full Employment

• Full employment equilibrium exists where the AD intersects SRAS and LRAS at the same point
• Recessionary Gap
• Exists when equilibrium occurs below full employment output
• Inflationary Gap
• Exists when equilibrium occurs beyond full employment output
• AD increase = real GDP, inflation , price level increases (unemployment decreases) 
•  Increase in SRAS ←: real gDP increase; inflation, price level