Unit 3

Aggregate Study

• The level of Real GDP (GDP_R) that firms will produce at each Price-Level (PL)

Long-Run v. Short-Run

• Long-Run
• 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 is directly related to the price-level.

Long-Run Aggregate Supply (LRAS)

• The Long-Run Aggregate Study 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.

Changes in SRAS

• An increase in SRAS is seen as a shift to the right. SRAS →
• A decrease in STAS is seen as a shift to the left. SRAS ←
• The key to understanding shifts in SRAS is per unit cost of production.
• Per unit production cost = total input cost/total output cost

Determinants of SRAS

• Input Prices
• Domestic Resource Prices
• Wages (75% of all business costs)
• Cost Capital
• Raw materials (commodity prices)
• Foreign Resource Prices
• Market Power
• Increases in Resource Prices = SRAS ←
• Decreases in Resource Prices = SRAS →
• Productivity
• Productivity = total output/total inputs
• More productivity = lower unit production cost = SRAS →
• Lower productivity = higher unit production cost = SRAS ←
• Legal-institution environment
• Taxes and Subsidies
• Taxes ($ to government) to business reduce per unit production cost = SRAS ←
• Subsidies ($ from government) to business reduce per unit production cost = SRAS →
• Government Regulation
• Government regulation creates a cost of compliance = SRAS ←
• Deregulation reduces compliance costs = SRAS →