Long Run vs Short Run
Long Run: time to input prices are completely flexible, level of real GDP supplied is independent of produced. LRAS is always vertical and hardly shifts.
Short Run: time to input prices is sticky and don't adjust to changes in price level.
Short Run Aggregate Supply (SRAS)
Reasons:
- An increase in SRAS is seen as a shift to the right
- A decrease in SRAS 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
Input Prices
- Domestic Resource Prices
- Wages (75% of all business cost)
- 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
- Increases in Resource Prices = SRAS shift left
- Decreases in Resource Prices = SRAS shift right
Productivity = total output / total inputs
More productivity = Lower Unit Production Cost = SRAS shift right
Lower Productivity = Higher Unit Production Cost = SRAS shift left
Legal-Institutional Environment
- Taxes and Subsidies
- Taxes on business increase per unit production cost = SRAS shift left
- Subsidies (money from government) to business reduce per unit production cost = SRAS shift right
- Government Regulation
- Government regulation creates a cost of compliance = SRAS shift left
-Recessionary Gap: a recessionary gap exists when equilibrium occurs below full employment output
-Inflationary Gap: exists when equilibrium occurs beyond full employment output
-Increase in AD: if CIGX increase, AD increases -->
3 Ranges of Aggregate Supply Curve
- Keynesian or Horizontal: the economy reaches less than Full Employment output.
- implies that the economy is in a recession
- Vertical or Classical Range: the economy reaches its Full Capacity real output.
- increase in the price level is equal to constant production
- Intermediate Range: expansion of real output and price level. After the full employment output, you have an increase in the price level which equals an increase in output
- basically, actual GDP can exceed Full Employment GDP
Hey Antonette, you blog is really great and informative. I just feel that some information is lacking substance and details because labeling something as "reasons" is vague. This can be fixed by adding tidbits such as:
ReplyDelete3 Reasons AD is Downward Sloping
1. Real balances effects
-when the price level is high, households and businesses cannot afford to purchase as much output
-When the prices level is low households and businesses can afford to purchase more outputs
2. Interest Rate effect
-A higher price level increases the interest rate which tends to discourage investment
- A lower price level decreases the interest rate which tends to encourage investment
3. Foreign Purchases effect
-A higher price level increases the demand for relatively cheaper imports
-A lower price level increases the foreign demand for relatively cheaper U.S exports
Thank you for your input, I have that information in my previous post titled aggregate demand (:
DeleteHello! Your blog is easy to comprehend and includes all the notes from this unit. One thing that I would suggest you add to your posts are graphs. Graphs for the AS and AD model would further help understand the concepts.
ReplyDeleteOkay, I'll add some on there! Thank you.
DeleteI like how your blog is very easy to understand! You have all the notes, but I would probably just add that LRAS is always vertical and hardly shifts. Also, I would put, maybe, a little more graphs like the ones we drew in class on here or a video for some other students that do not really understand the topics. But overall you have a nice blog!
ReplyDeleteAlrighty, thank you for the information and feedback! I'll try to make it a little more visual
DeleteHi Antonette
DeleteI think that your blog flows well and is easy on the eyes. Your background is calming and allows me to focus on your blog information. I found the posted video was very helpful and cleared up all my questions on the topic. I think that the Star Troopers are really cute and match your personality really well. One suggestion that I have would to maybe figure out a way to increase the size of your graphs, because sometimes they are hard to read. Other than that good job! :)