Aggregate Supply
- The level of Real GDP (GDPR) that firms will produce at each Price Level (PL)
Long - Run:
- 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:
- Period of time where input prices are sticky and do not adjust to changes in the price-level
- In the short-run, the level of Real GDP supplied is directly related to the price level
Long - Run Aggregate Supply (LRAS)
- The Long - Run Aggregate Supply or (LRAS) marks the level of full employment in the economy (analogous to PPC)
Short - Run Aggregate Supply (SRAS/AS)
- Because input prices are sticky in the short-run, the SRAS is upward sloping
Changes in SRAS
- Increase, Shift to the Right
- Decrease, Shift to the Left
- The key to understanding shift in SRAS is per unit cost of production
Per-Unit Production Cost = Total input cost / Total Output
Determinants of SRAS (all of the following affect unit production costs)
- Input Prices
- Domestic Resources Prices
- Foreign Resource Prices
- Market Power
- Productivity
- Productivity = (Total Output / Total Inputs)
- Legal-Institutional Environment
- Taxes and Subsidies
- Government Regulation
Don't forget to elaborate on the determinates of AS, they have a huge influence on the market. Domestic resource prices, foreign resource prices, the power of the market - all of these aspects create impact onto any country with a decent economy. For instance, under productivity, tell me how production costs shift the AS curve and how that translates to the economy. If there's an inadequate supply of production forces, then the production cost will have to increase in order to meet the sufficient level it needs to be. Don't forget to elaborate!
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