AGGREGATE SUPPLY

AGGREGATE SUPPLY

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Aggregate supply (AS) is the level of real GDP that firms will produce at each price level
Long-run is the period of time where input prices are completely flexible and adjust to changes in the price level. In the long-run, the level of real GDP supplied is independent of the price level.
Short-run is the period of time where input prices are sticky and don't adjust to changes in the price level. In the short-run, the level of real GDP supplied is directly related to the price level.
The two types of aggregate supply are: 
- long-run aggregate supply (LRAS) 
- short-run aggregate supply (SRAS).
Image result for long run aggregate supply curve










Long-run aggregate supply marks the level of full employment in the economy. Because input prices are completely flexible in the long-run, changes in price level don't change firms' real profits and therefore don't change firms' level of output.  LRAS is vertical at the economy's level of full employment.



Image result for short run aggregate supply curve


Short-run aggregate supply happens because input prices are sticky in the short-run, which means the SRAS is upward sloping.
Changes in SRAS:


  • an increase in SRAS shifts to the right 
  • a decrease in SRAS shifts to the left 
Shifts in SRAS happen because of the per-unit cost of production. 
The equation is:
per unit production cost = (total input cost)/(total output)



The determinants for SRAS are: 
- input or resource prices
- productivity
- legal-institutional environment.
The categories for input/resource prices are:
  • domestic resource prices
  • foreign resource prices
  • market power
It is also important to know:
  • increases in resource prices = SRAS <-
  • decreases in resource prices = SRAS ->
Productivity = (total output)/(total input)
  • more productivity = lower unit production cost = SRAS ->
  • lower productivity = higher unit production cost = SRAS <-
The two parts of the legal-institutional environment are:
  • taxes and subsidies
    • taxes = SRAS <-
    • subsidies = SRAS ->
  • government regulation
    • government regulation creates a cost of compliance = SRAS <-
    • deregulation reduces compliance costs = SRAS ->

If you still don't understand, here are some vids 2 help :) :

Short-run aggregate supply: https://www.youtube.com/watch?v=UwAQRnpVMzI
Long-run aggregate supply: https://www.youtube.com/watch?v=a2azB2eag5I

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