-Level of Real GDP that firms will produce at each given Price Level (PL)
Long Run v. Short Run
Long Run:
- Period of time where input prices are flexible and adjust to changes in the price level
- Level of Real GDP supplied is independent of the price level
- Period of time where input prices are sticky and do not adjust to price level change
- Level of Real GDP is directly related to the price level
Long Run Aggregate Supply (LRAS)
- Marks level of full employment in economy (analogous to PPC)
- Because input prices are flexible, changes in price level do not change firms' real profits and therefore do not change a firms' level of output. LRAS is vertical at full employment
Changes in SRAS (Short Run)
- Increase is to the right; Decrease is to the left
total output
Determinants:
1.) Input Prices
-Domestic Resource Prices
- wages (75% of business costs)
- cost of capital
- raw materials (commodity prices)
-Foreign Resource Price
- Strong $ = lower foreign resource price
- Weak $ = higher foreign resource price
- Market power
- increases in resource prices = SRAS shift to the left
- decrease in resource prices = SRAS shift to the right
2.) Productivity
- More productivity = lower unit prod. cost: SRAS shifts right
2.) Productivity
total output
total input
- More productivity = lower unit prod. cost: SRAS shifts right
- Less productivity = higher unit prod. cost: SRAS shifts left
3.) Legal-Institutional Environment
- Taxes and Subsidies
- tax on business increase per unit prod. cost = SRAS shift left
- subsidies to business reduce per unit prod. cost = SRAS shift right
- Government Regulation
- gov't regulation creates cost of compliance = SRAS shift left
- deregulation reduces compliance cost = SRAS shift right
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