Aggregate Supply

The level of Real GDP (GDP_r) that firms will produce at each price level (PL)

Long Run Aggregate Supply (LRAS): 

• period of time where input prices are completely flexible and adjust to changes in the price level 
• in the long-run, the level of GDP_r supplies is independent of price-level
• the LRAS marks the level of full employment in the economy (analogous to PPC)
• 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. This means that the LRAS is vertical at the economy's level of full employment.

Short Run Aggregate Supply:

• 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 GDP_r supplied is directly related to the price level 
• 

Changes in SRAS 

1. an increase is seen as a shift to the right
2. A decrease is seen as a shift to the left 
3. The key to understand the shift is per unit cost of production 
4. Per unit cost of production= total input cost/ total output cost 

Determinants of SRAS shifts

1. Input prices
2. Productivity 
3. Legal institutional environment 

Input prices 

• domestic resources prices:
• Wages (75% of all business costs)
• Cost of capital
• Raw materials (commodity prices)
• Foreign resource prices:
• Market power:
• Increases in resource prices will cause shifts to the left
• Decreases will cause shifts to the right 

Productivity = total output/ total inputs

• more productivity = lower unit production cost= SRAS shifts right 
• Lower productivity = higher unit production cost= shift to the left 

Legal-Institutional Environment 

·         taxes and subsidies:

·         Taxes ($ to gov't) on business increase per unit production cost = shift left

·         Subsidies($ from gov't) to business reduce per unit production cost = shift right 

·         Government regulation:

·         Gov't regulation created a cost of compliance = shift left 

·         Deregulation reduced compliance costs = shift right