UNIT 3: Aggregate Supply 2/19/16

Aggregate Supply is the Level of GDP that an economy will produce at the price level.
There are 2 types of Aggregate Supply, Long Run AS and Short Run AS.
In the Long Run:

• Input prices are flexible and adjusted to price changes 
• Real GDP is independent of price level
• Represents a level of "Full Employment"
• Analogous to PPC 
• Vertical due to flexible prices

In the Short Run:

• Input prices are sticky and do not adjust to price level
• Real GDP is directly related to Price Level.

SRAS is pretty much how much it costs to produce one unit of product.

Total output               =      Level of productivity 

Total input 

Total output               =      Cost of Production per unit

Total input PRICE

 

2/22/16

Input prices include wages(75%), Cost of Capital (factories and tools), Raw Material and foriegn resource prices.

SRAS shifts depending on 3 factors that affect production; Productivity, Legal Institution Environments (Taxes/subsidiaries), Government Regulations.

"Full Employment" (unemployment at around 4-5%) lies where SRAS LRAS and AD intersect

Recessionary Gap: Equilibrium below FE Level

Inflationary Gap: Equilibrium occurs beyond FE Level

3 ranges of SRAS: Keynesian Range, Classical Range, and an Intermediate Range (goes more in depth later) 

Nominal Wages - Total amount of money received before deductions (Taxes, Bill, etc)

Real Wages - Net wages or amount of buying power the wages have after deductions 

Sticky Wages - Nominal wages set to a specific price level due to things like work contracts etc.