Unit 3: Notes and Need-To-Knows 2.12.15

Aggregate supply: The level of real GDP that firms will produce at each Price Level. There are 2 types of Aggregate Supply: Short-Run and Long-Run

Long-Run: where input prices are completely flexible and adjust to change in price level.
Short: where input prices are sticky and do not adjusts to changes in the price level.


Long run aggregate supply (LRAS):
Shows the level of full employment in the economy.
LRAS is vertical at the economy's level level of full employment.
This occurs because input prices are completely flexible in the long run changes in price level do not change firms real profits and therefore do not change firms level of output.

Short run aggregate supply (SRAS):
Input prices are sticky in the short run which causes the SRAS to be upward sloping.

This is what the two graphs look like together

Things that can change SRAS:
1. Input Prices:
Domestic resource prices: 
Wages
Cost of capital
Raw material (commodity prices)

Foreign resource prices:
Higher Value results in lower foreign resource prices which shifts AS to the right

2. Productivity:
Total output / total inputs
Higher Productivity means lower Unit Production Cost which shifts AS to the Right     

3. Legal institutional environment
Taxes: Create higher Unit Production Cost
Subsides: Create lower Unit Production Cost