02/20/14 Aggregate Demand Ctd.

• Aggregate supply- The 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 the price level.
• In the long run, the level of Real GDP supplies in the 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.
• In the short run, the level of Real GDP supplied is directly related to the price level.
• Long Run Aggregate Supply (SRAS)
• The long run aggregate supply or LRAS marks the level of full employment in the economy. 
• Changes in SRAS
• An increase in SRAS is seen as a shift to the right. SRAS -->
• A decrease in SRAS is seen as a shift to the left. SRAS <--
• The key to understanding shifts in SRAS per unit cost of production.
• Per- Unit production cost= total input cost/total output cost
• Determinants of SRAS (all of the following affect unit production cost)
• Input prices
• Input Prices
1. Domestic Resource Prices
• Wages (75% of all business costs)
• Cost of capital
• Raw Material
2. Foreign Resource Prices
• Strong $= lower foreign resource prices.
• Weak $= higher foreign resource prices.
3. Market Power
• Monopolies and cartels that control resources control the price of those resources.
• Increases in resource prices= SRAS <--
• Decreases in resource prices= SRAS -->
• Productivity
• Productivity= total output/ total inputs
• More productivity= lower unit production cost= SRAS -->
• Lower productivity= Higher unit production coast= SRAS <--
• Legal- Institutional Environment
• Taxes and subsidies
• Taxes ($ to the government) on business increase per unit production cost= SRAS <--
• Subsidies ($ from government) to business reduce per unit production cost= SRAS -->
• Government Regulation
• Government regulations create a cost of compliance= SRAS <--
• Deregulation reduces compliance costs= SRAS -->