Aggregate Supply – Short Run

AP Macroeconomics

Where we came from…

Aggregate demand represents the sum of consumption (C), investment spending (I), government spending (G), and net exports (X-IM or NX)

The quantity of goods and services demanded at

any given price level is aggregate demand!

Where are we going?

Aggregate Supply is the quantity of output that firms are willing and able to produce for the economy. (i.e., the total supply of all goods and services in the economy)

In the LONG RUN, the level of output depends on:

1) capital stock

2) the labor force (productivity)

3) level of technology

Today, our concern is the SHORT RUN.

In this lesson…

You will learn about the determinants of aggregate supply and understand movements along, and shifts in, the aggregate supply curve.

~Determinants

~Movements

~Shifts

Aggregate Supply Curve

…shows the relationship between the total quantity of output supplied by all firms and the overall price level.

It is not the sum of individual firm supply curves. It is the relationship between production and the price level. It does not hold costs and prices constant, as in microeconomics.

Short-Run Aggregate Supply Curve…What does it hold constant?

Money wages Resource prices Potential GDP

Why? When we hold these constant, as overall prices rise then firms produce more output.

What is “potential GDP”?

“a measure of the real value of the services and goods that can be produced when a country's factors of production are fully employed.”

Definition adopted from : Potential GDP - Definition of Potential GDP - QFINANCE

What does the SRAS look like?

Visual 3.9, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net

Y* represents potential real GDP. It is full-employment output (vertical at full employment).SRAS is the short-run aggregate supply curve.

The SRAS curve can be represented as a vertical, horizontal, or positively sloped line (usually, it is positively sloped).

This (LRAS) is the Long-Run Aggregate Supply Curve

What causes a shift? The SRAS will change (a shift

in the curve) if the potential GDP changes (this is that forecast), if labor productivity changes, or if money wages or other resource/commodity prices change.

What causes a change in potential GDP (LRAS)?

A change in full employment quantity of labor, a change in quantity of capital or technological advance.

Note: We’ll come back to shifts in LRAS in a later lesson…

Shifts in Aggregate Supply

1. Potential GDP increases from Y* to Y*1. The LRAS shifts to LRAS1 and the short-run aggregate supply curve shifts to SRAS1.

2. Decrease in resource prices will shift the SRAS to SRAS1. A decrease in the money wage rate does not change the LRAS.

Visual 3.10, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net

Determinants (that shift) of Aggregate Supply

An increase in labor productivity. What affect will this have on the supply curve?

This will shift the SRAS to the right.

Determinants of Aggregate Supply

An increase in the average wage rate. How will this affect the supply curve?

This will shift the SRAS to the left.

Determinants of Aggregate Supply

An increase in technology. How will this shift the curve?

this will shift the SRAS to the right.

And now…

Some resources:

http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesiancross.swf

Works Cited

Economics of Seinfeld. Demand. http://yadayadayadaecon.com/clip/46/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.