Aggregate Supply

Aggregate Supply - The level of real GDP  that firms will produce at each price level (PL)

Long Run vs Short Run

Long Run - Period of time where input prices are completely flexible and adjust to changes in price level.

- The 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.

-The level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS) - Marks the level of full employment in the economy

Short Run Aggregate Supply (SRAS) - Because input prices are "sticky"

Changes in SRAS - Increase is a shift to the right and Decrease is a shift to the left

Per Unit Production Cost = total input cost / total output

Determinants of SRAS

1. Input Prices

2. Productivity

3. Legal Institution Environment

1. Input Prices (Domestic Resource Prices)

- Wages (75% of all business cost)

- Cost of capital

- Raw Material

Foreign Resource Prices

- Strong Money = Lowers foreign resource prices

- Weak Money = Higher foreign resource prices

Market Power

- Monopolies and cartels that control resources control the price of those resources

2. Productivity

- productivity = total outputs / total inputs

- more productivity = lower production cost

- lower productivity = higher production cost

3. Legal Institutional Environment

- Taxes and subsidies on businesses increase per unit production cost

- Subsidies to business reduce per unit production costs

Government Regulation - Creates a cost of compliance

Deregulation - Reduces compliance costs