Ethanomics: Aggregate Supply

I. Level of GDP that firms will produce at each Price level

II. Long-Run Aggregate Supply (LRAS)

a. Period of time where input prices are completely flexible and adjust to changes in the price-level

b. In the long run, the level of Real GDP supplied is independent of price-level

c. Always vertical

d. Only changed by the same changes of PPG

e. Marks the level of full employment in the economy (same as the PPG)

f. (insert graph)

III. Short-Run Aggregate Supply

a. Period of time where input prices are sticky and do not adjust to changes in the price-level

b. The changes are the determinants

c. In the short-run, the level of real GDP supplied is directly related to the price level.

d. Since the input prices are sticky in the short-run, the SRAS is upward sloping. This reflects the fact that in the short-run…..

e. (insert graph)

f. Increase makes shift right and decrease makes a shift left

g. Per unit cost of production is important. (Total Input Cost)/(Total Output)

h. Determinants

i. Input Prices

1. Domestic Resource Price

a. Wages (75% of all business costs)

b. Cost of capital

c. Raw materials

2. Foreign Resource Prices

a. Strong Dollar = lower foreign resource prices

b. Weak Dollar = higher foreign resource prices

3. Market Power

a. Monopolies and cartels control resources.

4. Inversely proportional to SRAS

ii. Productivity

1. Total output/ total inputs

2. Directly proportional to SRAS

iii. Legal- Institutional Environment

1. Taxes (inversely proportional)

2. Subsidies (directly proportional)

3. Government Regulations (inversely proportional)

Ethanomics