Aggregate Supply

Aggregate Supply- the level of Real GDP that firms will produce at 
each price level .

Long Run v. Short Run

• Long Run: period of time where input prices are completely flexible and adjust to change in price level. The level of Real GDP supplied is independent of price-level.
• Short Run: period of time where input prices are sticky and do not adjust to changes in price-level. The level of Real GDP supplied is directly related to the price level.

Long Run Aggregate Supply (LRAS)

• The LRAS marks the level of full employment in the economy (analogous to PPC).
• Because the  input prices are completely flexible in LR, changes in price-level do not change firms real profits and therefore do not change firms level of output. This means that LRAS is vertical at the economy's level of full employment

Changes in SRAS

• An increase in SRAS shift to the right
• A decrease in SRAS shift to the left
• The key to understanding shifts in SRAS is per unit cost of production
• *per unit cost = total input cost / total amount produced

Input Prices

• Domestic Resource Prices: wages (75% of all business costs), cost of capital, raw materials (commodity prices)
• Foreign Resource Prices: strong $ = lower foreign resource prices, weak $ = higher foreign resource prices
• Market Power
• Increase in Resource Power: increase = SRAS shift left; decrease = SRAS shift right

Productivity

• = total output / total input
• more productivity = lower unit production cost, SRAS -->
• lower productivity = higher unit production cost, SRAS <--

Legal-Institutional Environment
-Taxes & Subsidies

• taxes ($ to gov't) on business increase per unit production cost, SRAS <--
• Subsidies ($ from gov't) to business reduce per unit production cost, SRAS -->

-Government Regulation

• government regulation creates a cost of compliance, SRAS <--
• deregulation reduces compliance costs, SRAS -->