Aggregate Supply (AS)

Aggregate Supply (AS): the level of real GDP (GDPr) that firms will produce at each price level (PL)

Long Run:
-a 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 us directly related to the price level

Long run aggregate supply (LRAS): marks the level  of full employment in the economy (analogous to PPC)
-because input prices are completely flexible in the long run, changes in price level do not change firms' real profits and therefore do not change firms' level of output. This means that the LRAS is vertical at the economy's level of full employment

Short run aggregate supply (SRAS): Because input prices are sticky in the short run, the SRAS is upward sloping

Changes in SRAS
-an increase is seen as a shift to the right
-an decrease is seen as a shift to the left
-the key to understanding shifts 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 cost)
1. Input prices
-domestic resource prices

• wages (75% of all business costs)
• cost of capital
• raw materials (commodity prices)

-foreign resource prices

• strong $ = lower foreign resource prices
• weak $ = higher foreign resource prices

-market power

• monopolies and cartels that control resources control the price of those resources

-increase in resource prices = shift left

-decrease in resource prices = shift right

2. Productivity: total output/total input

-more productivity = lower unit production cost = shift right

-lower productivity = higher unit production cost = shift left

3. Legal insitutional environment 

-taxes and subsidies

• taxes ($ to govt) on business increase per unit production cost = shift left
• subsidies ($ from govt) to business reduce per unit production cost = shift right

-government regulation 

• government regulation created a cost of compliance = shift left 
• deregulation reduces complainants costs = shift right