AGGREGATE SUPPLY

-the level of real GDP (gdp r) that firms will produce at each price level (PL)

Long run v Short run

Long run

-period of time where input prices are completely flexible and adjust to changes in the price level

-in the long run the level of real GDP supplied is independent of price-level

Short run

-period of time where input prices are stucky and do not adjust to changes jn the price level

-in the short run the level of real GDP supplied is directly realted to the price-level

Long run aggregate supply (LRAS) 

-The LRAS marks the level full employment in the economy

-Because input prices are completely flexible in the long run, changes in theprice level do not change firms' level of output. That means that LRAS is verticleat the economy's level of full employment.

Changes in SRAS

-increase in sras is seen as a shift to the right SRAS->

A decrease in sras is seen as a shift to the left SRAS <-

The key unit to understanding shifts ij sras is per unit cost of production 

-Per unit production cost= total input cost / total output-

Determinants of SRAS

INPUT PRICES

Domestic resource prices

.wages (75% of all buisness costs)

.cost of capital

.raw materials

Foreign reource prices

Market Power

Increase in resources prices = SRAS <-

PRODUCTIVITY

productivity = total output / total inputs

More productivity = lower unit production cost = SRAS ->

Lower Productivity = higher unit production cost = SRAS <-

LEGAL INSITUTIONAL ENVIROMENT

-Taxes and subsidies-

-Taxes ($ to govt) on buisness increase per unit production cost = SRAS <-

-Subsidies ($ from govt) to business reduce per unit production cost = SRAS ->

GOVERNMENT REGULATION

-government regulation creates a cost of compliance = SRAS <-

-Degregation reduces compliance costs

= SRAS ->

Full employment 

-full employment equilibrium exists where AD intersects SRAS & LRAS at the same points

Recessionary gap

-a ressionary gap exsts when equilibrium occurs below full employment output

Inflationary gap

-exists when equilibrium occurs beyond full employment output