Unit 3 : Aggregate Supply

Aggregate supply:

• the level of real GDP that firms will produce at each price level.

Long Run Vs. Short Run:

Long Run(LRAS)	Short Run(SRAS)
Period of time where input prices are completely flexible and adjust to changes in the price level.	Period of time where the input prices are sticky and do not adjust to changes in price level.
The level or RGDP supplied is independent of the price level. The LRAS marks the level of employment in the economy.( analogous to PPC) LRAS is always VERTICAL at full employment.	The level of RGDP supplied is directly related to price level.

Changes in SRAS: 

• Increase in SR= shift right
• Decrease in SR=shift left.
• Key to understand shifts in SRAS is per unit of cost of production.

Determinants of SRAS: (all affect Unit Production Cost)

• Input Prices.
• Productivity.
• Legal Institutional Environment.

Input Price:

• Increase in resource price: SRAS <--
• Decrease in resource price: SRAS -->

Productivity:

• more productivity= lower unit production costs=SRAS --->
• lower productivity=higher unit production costs=SRAS <---