AS Notes

AS - AGGREGATE SUPPLY

• Aggregate Supply(AS) - The level of real GDP that firms will produce at each price-level. 
• There are two types: Long Run Aggregate Supply(LRAS) & Short Run Aggregate Supply(SRAS)

1. LRAS- Period of time where input prices are completely flexible and adjust to changes in price level. In the long run, the level of real GDP is supplied independent of the price level.
1. Marks the level of full employment in the economy
2. Analogous to PPC
2.  SRAS- Period of time where the input pries are sticky and DO NOT adjust to changes in the price level. In the short run, the level of real GDP is supplied directly related to the price level.
1. Because the input prices are sticky in the short run, the SRAS is upward slopping.

• Changes in SRAS:
• Increase in SRAS, shifts right.(>>)
• Decrease in SRAS, shifts left(<<)

• Per unit production cost: The key to understanding shifts in SRAS is per unit cost of production.
• P.U.C.P = Total Input Cost / Total Output Cost
• Determinates of SRAS:

1. Input Prices:
1. Domestic resource prices - Wages (75% of all business costs), cost of capitals, and raw materials.
2. Market Power - Monopolies/Cartels that controls resources that control the price of those resources.
3. Foreign Resource Price - Strong money = Decrease for FRP. Weak money = Increase for FRP.
4. Increase in resource price = SRAS moves (<<), while a decrease in resource = SRAS moves(>>)
2. Productivity:
1. TOTAL OUTPUT / TOTAL INPUT = Productivity
2. More productivity = lower unit production cost = SRAS (>>)
3. Less productivity = higher unit production cost = SRAS (<<)
1. An ex. is listed below:



3. Legal institutional environment: 
1. Taxes/Subsidies - Taxes ($ to government) on business increase per unit production cost = SRAS shift(<<). Subsidies - ( $ from government) to business reduce per unit production cost = SRAS shifts(>>)
2. Government Regulation - Government regulation creates a cost of compliance = SRAS shift (<<). Deregulation reduces compliance cost = SRAS shift (>>)

MEANING OF AS CURVE

• Keynesian/Horizontal range: 
• Unemployed resources which results in recession or depression. It includes only levels of real output that are less than the full employment output. 
• Intermediate range:
• Resources are getting closer to the full employment levels which creates upward pressure on wages and prices. The upward pressure is caused by rising cost of doing business. Sticky wages or sticky prices cause the "AS" curve to be positively sloped. Wages/Prices maybe slow to adjacent or sticky if firms or workers lack information. 
• Classical/Vertical Range: 
• When real GDP is at a level with unemployment at the full employment level and when any increase in demand will result in an increase in prices, the economy is unable to produce anymore goods and services for a sustainable period of time.