Aggregate Supply

Aggregate Supply November-24-08 9:18 AM

Aggregate Supply - relationship between the general price level and real output produced in the economy AS-> Sellers - sell at highest price at lowest cost Aggregate Supply Schedule : relationship between general price level and real output expressed in a table Aggregate Supply Curve : expressed on a graph

Aggregate Supply Curve

Changes in Aggregate Supply (AS) (these are variable that change total output at all price levels) 1. Input prices: a. Short run decrease in AS : a decrease in total output at al price levels, with no change in potential output b. Short Run increase in AS: an increase in total output at all price levels, with no change in potential output. 2. Resource Supplies: a. Over the long term, supply of resources in an economy (human and capital) tend to grow. With such an increase, businesses tend to produce more real output at every price level. - More input over a long period of time increase AS. b. Long Run Increase In AS: an increase in total and potential output at all price levels. c. Long Run Decrease In AS: a decrease in total and potential output at all price levels. 3. Productivity: a. Labour Productivity: Quantity of output produced per worker in a certain period of time. b. Labour Productivity = Real Output / Total Hours Worked c. Increases in productivity are largely due to technological progress. Causes the AS to shift to the right.

Price Level Potential Output (MAX EFFICIENCY)

Real GDP

Aggregate Supply Curve SHORT RUN

SHIFTS IN THE AS CURVE Aggregate supply increases, with the AS curve shifting to the right, and potential output staying the same with the following: 1. A decrease in input prices due to a. A fall in wages b. A fall in raw material prices

Price Level Potential Output (MAX EFFICIENCY)

Aggregate Supply increases, with the AS curve shifting to the right and potential output increasing with the following: Real GDP

2. An increase in supplies of economic resources due to a. More labour supply b. More capital stock c. More land d. More entrepreneurship 3. An increase in productivity due to technological progress 4. A change in government policies: a. Lower taxes b. Less government regulation

Aggregate supply decreases, with the AS curve shifting to the left, and potential output staying the same with the following:

Aggregate Supply Curve LONG RUN

Price Level Potential Output (MAX EFFICIENCY)

1. A increase in input prices due to a. A rise in wages b. A rise in raw material prices Aggregate Supply decreases, with the AS curve shifting to the left and potential output increasing with the following: 2. An decrease in supplies of economic resources due to a. less labour supply b. less capital stock c. less land d. less entrepreneurship 3. An decrease in productivity due to technological decline 4. A change in government policies: a. higher taxes b. more government regulation

10.2 Practise Questions 1. -

a. b. c. d. e. f. g.

Long-run, shift to right, increase in resources Shift to left, long run, government policy Shift to left, long-run, input prices Shift to right, short run Shift to left, long run Shift to left, long run Shift to right, long run

Unit 3 - Fiscal Policy Page 1

Real GDP

Unit 3 - Fiscal Policy Page 2