Aggregate supply worksheet

Aggregate supply worksheet

Objective 1 and 2: define short-run aggregate supply (sras)

AS is the total amount of goods and services that all industries in the economy will produce at every given price level

Always long and short run

Short run is when all the factors of production do not change

The short run in microeconomics is the period of time when the prices of the factors of the production do not change so there is a positive relationship between output and average price levels.

Shifts in the SRAS curve

A change in anything other that price level will result in a shift of the whole sras curve

Typical examples of supply side shock

A change in wage rates

Ec. Gov increases min wage

A change in cost of raw material

-          Like oil

Define supply side shock- factors that result in changes (usually in increase) in the cost of production.

Decrease costs will cause sras to increase shift right

Increase in costs will cause sras to decrease- shift let

Typical examples of suuplu side shocks.

Changes in wage rates	Increase in wages- increase in cost of production to firms so a decrase in SRAS. IE.  Gov raises legal minimum wgae
Change in costs of raw materials	To affect SRAS the raw material must be significant. IE. Oil So an increase in price of oil decrease in SRAS
Change in price of imports	Increase import prices decrease in SRAS A fall in currency value -> more expensive imports decrease in SRAS
Changes in gov indirect taces or subsidies	Increase in taxes-> incease cost to firm -> decrease in SRAS Decrease in subsidies -> increase cost to firm-> decrease in SRAS

Equilibrium

Short run macroeconomic equilibrium occurs when aggregate demand is equal to SRAS

The long run is a time period long enough that all factor prices change

LRAS is highly dbated among economists

The two types of LRAS are:

The Keynesian LRAS curve

The neo-classical LR         AS curve

-The keynesisian LRAS curve

-          Three phases.

Objective 4: distinguish between the short run aggregate supply curve (sras) and the long run aggregate supply curve (Lras)

Short-run aggregate cupply (sras)- shows a positive relationship between level of putput and average price levels because prices of factors of production are fixed

Long-run aggregate supply curve LRAS- Represents the level of output at full employment *natural rate of unemployment) or when the economy reaches its potential output

Keynesian AS

The Keynesian AS curve shows three phases and does not really distinguish between the SR and the LR

Phase 1: perfectly elastic phase- low output levels mean industries can increase output without incurring higher average costs due to spare capacity in the economy

Phase 2: security phase- as the economy approaches Yf spare capacity is used up and FOP are scarce. Producers start competing for scarce FOP so increased output means higher costs so higher average price levels

Phase 3: Economy has reached full capacity (yf) so output cannot be increased so competition amng firms for FOP results in increase average price levels (inflation) output cannot go up without a shift in the curve

Neo-classic monetarist (the Austrian school)

-          These schools of thought believe in the efficiency of the market so promote minimal gov intervention in the allocation of resources

-          LRAS is vertical at Full employment level of output which represents potential output

-          View asserts that the potential output is based entirely on the quantity and quality (productivity) of fop and not an price level

-          So LRAS is independent of price level, Price levels might raise but level of output does not change.

The LRAS curve will shift outward if there is an improvement in the quality (increase in productivity (output per unit of input) of fop) or an increase in the quantity of the factors of production

                -Improvement in quality and increase in quantity are both often due to advances in technology- so tech improvements are vital to supply side of any economy.

Factor of production	Increase In quantity	Increase in quality
Land (all natural resources)	Land reclamation (Netherlands reclaiming the sea from the north sea) Increase access to supply Discovery of new resources	Tech advances that allow increased access or discovery of new resources Fertilizers irrigation
Labor + entrepreneurship	Increase of birth rate Immigration Decrease in natural rate of unemployment	Education Training Re-training Apprenticeship programs
capital	Investment	Tech advances that contribute to more efficient capital Resource and development

Interventionist supply side policies (keynsisian)	Market based supply side policies (classic)
Investment in human capital (education) (training)	Reduction in household income taxes
Research and development Tax incentives, enforcing intellectual. Property rights or research and development in universities	Reduction in corporate taxes
Provision and maintenance of infrastructure	Labor market reform 1)reduce trade union power 2) reduce or eliminate minimum wage 3) reduce unemployment benefits
Direct support for businesses/industrial policies Anti trust laws, helping small/medium sized firms become established and grow	Deregulation
Infrastucture- large scale capital which is necessary for economic activity to take place, usually provided by government	Privatizing
	Policies to increase competition