Aggregate Supply

Aggregate Supply- the level of Real GDP (GDPR) that firms will produce at each price level (PL)
                                        +long run and short run

Long Run
-period of time where input prices are completely flexible and adjust to changes in the price level
-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
-level of Real GDP supplied directly related to the price level

Long Run Aggregate Supply (LRAS):
- LRAS 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, does not change firms' level of out put. which means that the LRAS is vertical at the economy's level of full employment.



Short Run Aggregate Supply (SRAS)
-An increase in SRAS is seen as a shift to the right (SRAS ---->)

- A decrease in SRAS shifts to the left (SRAS <------)

- Key to understanding shifts in SRAS is per unit cost of production.

EQUATION: 

per unit production cost =   total input cost
                                           --------------------
                                            total output cost

Determinate of SRAS :
(ALL AFFECTS UNIT PRODUCTION COST)
1. Input prices
2. Productivity
3. Legal - institutional enviroment


Input Prices
-domestic resource prices
           +wages 75% of all business costs)
             + cost of capital
                  + raw materials (community prices)
Foreign resource Price

Market Power



Increases in resources price= SRAS <---------

Decrease in resource price= SRAS --------->



Productivity

EQUATION:     productivity= total output
                                                  ----------------
                                                   total input

More productivity= lower unit production cost= SRAS ---->

Lower productivity= higher unit production cost= SRAS <----


Legal Institutional Environment
-Taxes and subsides
    + taxes ($ to government) on business increase per unit production cost = SRAS <---
    +subsides ($ from government) to business reduce per unit production cost= SRAS ---->

- Government Regulation
    + creates a cost of compliance= SRAS <---
    +deregulation reduces compliance costs= SRAS --->