AGGREGATE SUPPLY

With Mrs. Eskra

OBJECTIVES:What will you learn?

• What Aggregate Supply (SRAS and LRAS) are and what they look like.

• Difference between SRAS and LRAS.• How LRAS can move to change our

country’s production capabilities.

AS/AD Model

The x-axis represents quantity as in microeconomics, but OVERALL quantity in an economy (real GDP).

The y-axis represents the overall price level, not just price of specific item.

This is the most common graph that shows overall (macroeconomic) activity.

Aggregate SupplyAggregate Supply

Relationship between the price level and the total amount (of real GDP) producers are willing to produce.

This relationship changes over time, so we need to distinguish between the short run and the long run.

SRAS

Short-run aggregate supply is assumed to maintain the positive price and

quantity correlation; more can be produced through increased

resource utilization, technological improvements or other factors.

SRAS is an upward sloping curve.

Aggregate Supply(SRAS)

Positive relationship between the price level and the total amount (of real GDP) producers can produce.

In the short run, businesses can produce more as prices rise:-Won’t have to pay workers more immediately.-Can use their inventories.

This is why it is possible for AS to slope upwards in the short run.

Aggregate Supply(SRAS)

Think about it this way:

You can pull an “all-nighter” to cram for an exam or get your house ready to entertain the next day. This way you can accomplish more than normal.

Would this level of activity be sustainable for you, night after night, indefinitely?

Aggregate Supply(SRAS)

Think about it this way:

If employers want to take advantage of higher prices in the short run, they can hire workers to work overtime and draw down their inventories to produce more right now.

At some point, though, there is a limit to the amount of resources (land, labor, and capital).

What will Shift SRAS?

• Anything that will help producers supply more will increase SRAS in the economy, like:– Excellent weather– Natural resources– Labor force productivity / education– Reduced costs to firms

What will Shift SRAS?

• Anything that will make if more difficult for producers will decrease SRAS in the economy, like:– Natural disasters / bad weather– Labor force changes, like an aging population or

lack of education– Increased costs to firms

LRAS

Long-run aggregate supply is assumed to be constant in the long-run as in the long-run resources are

assumed to be used optimally, leaving no potential for increasing

capacity. LRAS is a vertical curve.

Aggregate Supply(LRAS)

This LRAS curve represents our economy’s full potential in terms of production, given our current resources.

This amount of production is possible when resources are fully employed (zero cyclical unemployment).

So our production capacity is fixed unless something changes to increase our ability to produce more.

Aggregate Supply(LRAS)

Ramping up our production in the short run can only get us so far. In the long run we have a limited amount of resources (materials, workers, etc).

In the long-run, then, the amount of production that producers can sustain is fixed.

So our production capacity is fixed unless something changes to increase our ability to produce more.

SUSTAINABILITY

Consumption and production that does not stress or exceed the

threshold required for natural regeneration of depleted resources.

Aggregate Supply(LRAS)

Example:

If many producers use our resources (like timber) faster than these resources are being replaced, this rate of growth is unsustainable.

So how does our economy grow over time, then?

LRAS can move!Over time, it is possible for the economy to grow.

We must find more land, labor or capital:

-Population changes (greater amount of people in workforce)

-Discover new resources

-Advance technology

These changes would shift out our LRAS, giving us the ability to produce more into the long run.

LRAS can move!However, the LRAS can also shift to the left.

This happens if something reduces our amount of land, labor or capital:

-Natural disasters

-WarsThese changes would shift our LRAS in, decreasing our ability to produce into the long run.

RECAP:What did you learn?

• What Aggregate Supply is and what it looks like.

• Difference between SRAS and LRAS.• How LRAS can move to change our

country’s potential for production.