Skip to main content

Unit 3: Aggregate Supply

Aggregate Supply: Level of real GDP  (GDPr) that firms will produce at each price level (PL)
Long Run: period of time where input prices are completely flexible and adjust to changes in price level ; level of real GDP supplied is independent of 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 is directly related to price level
Long Run Aggregate Supply (LRAS): marks the level of full employment in economy (analogous to PPC)
Short Run Aggregate Supply (SRAS): input prices are sticky in the short run, SRAS is upwards sloping.

Changes in SRAS: increase is shift to the right & decrease is shift to the left ; key to understanding is per unit cost of production  ; formula: per unit production cost = total input cost / total output

Determinants of SRAS  (all of following affect until production cost):
  1. input prices: domestic resource prices (wages <75% of all business costs>, cost of capital, raw materials <commodity prices>), foreign resource prices (strong $ = lower & weak $ = higher), market power (monopolies and cartels that control resources, control price of those resources), increase in resource prices SRAS left & decrease in resource prices in SRAS right
  2. productivity: total output / total input , more productivity = lower till unit production cost = SRAS right & lower productivity = higher unit production cost = SRAS left
  3. legal institutional environment: *taxes and subsidies - taxes ($ to govt) on business increase per up production cost = SRAS left ; subsidies ($ from govt) to business reduce per unit production cost = SRAS right /// *government regulation: government regulation creates a cost of compliance = SRAS left ; deregulation reduces compliance costs = SRAS right
The AS/AD Model: equilibrium of AS and AD determines current output (GDPr) and the price level (PL)
Full Employment: equilibrium exists where AD intersects SRAS and LRAS at same point
Recessionary Gap: exists when equilibrium occurs below full employment output
Inflationary Gap: exists when equilibrium occurs beyond full employment output
*pie symbol = inflation & u = unemployment

Ranges:
  1. Horizontal or Keynesian: lots of unemployed resources creates recession or depression; includes only levels of real GDP that are less than full employment output l
  2. Intermediate: resources are getting closer to full employment level which creates pressure on wages and prices
  3. Classical or Vertical: real GDP at level with unemployment at full employment level and with any increase in demand will result an increase in prices; economy unable to produce anymore goods and services for sustainable period of time

Investment: money spent or expenditures on new plants (factories), capital equipment  (machinery), technology (hardware and software), new homes, inventories (goods sold by producers)

Image result for aggregate supply

Comments

  1. UnknownApril 5, 2018 at 10:31 PM

    Great way of organizing your blog and putting everything together as well as being able to add in some pictures to make the topic easier to understand. All information seems to be there and my only advice would be to maybe color code more.

    ReplyDelete

Post a Comment

Popular posts from this blog

Unit 4: Monetary Policy Basics

Uses of Money: Medium of Exchange Unit of Account Store of Value Types of Money: Commodity money Representative money (IOU’s) Fiat money ($ bc govt says so) Characteristics of Money: Durability Portability Divisibility Uniformity Scarcity Acceptability Money Supply:     M1 Money) cash, coins, currency, traveler’s checks, demand or checkable deposits (largest component)     M2 Money) M1 Money + savings accounts     M3 Money) M2 Money + money market accounts + CDs Liquidity: easy to convert to cash Balance Sheet: summarizes finance decision of a bank at a certain time Liabilities = Assets Liabilities (owe): RR and ER; Assets (own): DD; net worth or owner’s equity Required Reserve + Excess Reserve = Demand Deposit RR: Bank holds a fraction of deposit back as reserve in bank ER: Held by a bank or financial institution in excess of what is required ...
2 comments
Read more

Unit 3: Rate of Return, Investment Demand, Disposable Income

Investment: money spent or expenditures on new plants (factories), capital equipment  (machinery), technology (hardware and software), new homes, inventories (goods sold by producers) Expected Rate of Return: -How does business make investment? Cost / benefit analysis -How does business determine benefits? Expected rate of return -How does business count the cost? Interest costs -How does business determine amount of investment they undertake? Compare expected rate of return to interest cost (return > interest cost : invest // return < interest cost: don't invest) -What determines cost of investment decision? Real Interest Rate (r%) Investment Demand Curve (ID) - What is the shape of investment demand curve? Downward sloping -Why? When interest rates are high, fewer investments are profitable; when low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return D...
Post a Comment
Read more

Unit 3: MPC & MPS, Multipliers, Deficits/Surplus/Debt, Fiscal Policy

MPC & MPS: Marginal propensity to consume: delta C / delta DI ; % of every extra dollar earned that is spent Marginal propensity to save: delta S / delta DI ; % of every extra dollar earned that is saved MPC+MPS=1 1-MPC=MPS 1-MPS=MPC Spending Multiplier Effect: initial change spending (C,Ig,G,Xn) causes larger change in aggregate spending or AD Formula: Multiplier = change in ad / change in spending Happens because expenditures and income flow continuously which sets off a spending increase in economy Formula: Multiplier = 1 / 1-MPC or 1 / MPS Multipliers are positive when there's increase in spending and negative when there's decrease Tax Multiplier: when government taxes, multiplier works reverse bc money leaves circular flow Formula: Tax Multiplier = -MPC / 1-MPC or -MPC / MPS if tax cut, multiplier is positive bc more money in circular flow *MPS, MPC, Multipliers: Fiscal Policy: changes in expenditures or tax revenues of federal gov...
1 comment
Read more