AGGREGATE SUPPLY (AS) Flashcards
Aggregate Supply (AS)
The total quantity of output (i.e. real GDP) firms will produce and sell at a given price level
Aggregate Supply (AS) Curve
The relationship between the Price Level and the level of aggregate output (real GDP) supplied
Short-Run Aggregate Supply (SRAS)
Upward-sloping
Price Level ↑ ⇒ rGDP ↑
Long-Run Aggregate Supply (LRAS)
Vertical
Price Level ↑ ⇒ ∆rGDP = 0
Long-Run
All resources are fully utilized.
Long-run GDP is also called…
Potential GDP, Full Employment GDP or Natural Rate of GDP
Potential GDP
The level of output towards which the economy
gravitates in the long run
Why is SRAS curve slopes upward?
Sticky-Wage Theory, Sticky-Price Theory, Misperceptions Theory
Sticky-Wage Theory
Nominal wages are slow to adjust to changing economic conditions, or are “sticky” in the short run.
Nominal wages do not adjust immediately to a fall in the price level.
A lower price level makes employment and production less profitable.
This induces firms to reduce the quantity of goods and services supplied
Sticky-Price Theory
Prices of some goods and services adjust sluggishly in response to changing economic conditions.
An unexpected fall in the price level leaves some firms with higher-than-desired prices.
For a variety of reasons, they may not want to or be able to change prices immediately
This depresses sales, which induces firms to reduce the quantity of goods and services they produce
Misperceptions Theory
An unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production
What factors shift the aggregate supply curve?
Input Price ↑ ⇒ AS ↓ → AS shifts left
Technology or productivity ↑ ⇒ AS ↑ → AS shifts right
Legal-institutional environment
