Aggregate Supply

Aggregate Supply

2-21-17

Aggregate Supply: Level of real GDP firms will produce at each price level.

Long and Short Run

• Long run: Period of time where input prices are completely flexible and adjust to changes in price level
• Level of real GDP supplied is independent of price level
• Short run: Period of time where input prices are sticky and do not adjust to changes in the price level.
• Level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS)

• The long run aggregate supply marks the level of full employment in the economy (analogous to PPC)

Short Run Aggregate Supply (SRAS)

• Because input prices are sticky in the short run, SRAS is upward sloping.
• Key to shifts in SRAS is per unit cost of production
• Per-unit production cost: total input cost/ total output
• Changes in SRAS:
• Input Prices
• Productivity
• Legal-Institutional environment