March 3, 2014

February 26, 2015

1. Review Multipliers HW (Activity 3-2)

2. Lesson 3-3: Aggregate Supply

Supply

Aggregate SupplyThe Supply Side of the AD/AS Model

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What is Aggregate Supply?Aggregate Supply (AS): total supply of goods and services that firms will produce in an economy at different price levels.

Relationship between price level and total quantity of output that all firms are willing and able to produce (AS = Real GDP)

The supply for everything by all firms.AS depends on Q of Labor, Q of capital, and level of technology.ALL OF THESE ARE FIXED IN SHORT RUN!

Aggregate Supply differentiates between short run (SRAS) and long-run (LRAS) and has two different curves.

Short-run Aggregate Supply (SRAS)•Graph looks like a “regular” supply curve- positively sloped

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Aggregate Supply Curve

Price Level

Real GDP)

AS

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Note theUp-sloping Curve

Short-Run Aggregate Supply (SRAS)In the Short Run, Q of L changes, but Capital and Technology are fixed. In SR, the price of ALL INPUTS ARE FIXED (STICKY) due to wage contracts & delays in recognizing unanticipated inflation.

OUTPUT PRICE DEPENDS SOLELY OF PRICE LEVEL.

Example:• If a firm currently makes 100 units of a

product that are sold for $1 each. The only cost is $80 of labor.

How much is profit?• Profit = $100 - $80 = $20

What happens in the SHORT-RUN if price level doubles?

• Now 100 units sell for $2, TR=$200. How much is profit?• Profit = $120

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Shifts in Aggregate Supply

Price Level

Real GDP

AS

An increase or decrease in national production can shift the curve right or left

AS1

AS2

Shifters of Aggregate Supply

1. Change in Resource PricesPrices of Domestic and Imported Resources (Increase in price of Canadian lumber…)(Decrease in price of Chinese steel…)Supply Shocks(Negative Supply shock…natural disaster, war,

terrorism)(Positive Supply shock…the assembly line)

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Shifters of Aggregate Supply2. Change in Actions of the Government

(NOT Government Spending)Taxes on Producers (Lower corporate taxes…)Subsidies for Domestic Producers (Lower subsidies for domestic farmers…)

3. Change in Productivity/TechnologyTechnology (Computer virus that destroys half the computers…)

March 6, 2014

1. Review AD/AS Model Graphing HW

2. Notes: Types of Inflation & LRAS Intro

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Types of InflationChanges in AD and AS lead to

changes in the price level (inflation/deflation)

A shift in either AD or AS determines which type of inflation is experienced.

DEMAND-PULL Inflation: Caused by a shift in AD curve.

Occurs when demand for goods/services increases (causing Real GDP to expand and price level to increase.)

“Too much money chasing too few goods.”

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Demand-pull inflation

Types of Inflation

COST-PUSH Inflation: Caused by a shift in the AS curve.

Caused by increase in the cost of an input with economy-wide importance.

i.e.: Increase in wages nationally or the cost of oil.13

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Stagflation:High Unemployment& high inflation

Example Scenarios…Which type of inflation is it?

1. President Obama calls for an increase in the U.S. military presence around the globe to combat a threat to American trade routes.

2. The Arab Spring of 2010 disrupts oil production and supplies worldwide, causing OPEC to raise crude oil prices.

3. The federal government raises the minimum wage to $12 an hour.

4. The U.S. government expands Social Security, Medicare, and Medicaid benefits, causing the U.S. to run a budget deficit the next year, which leads to increased government borrowing. 15

March 10, 2014

1. Let’s Catch Up…Website Visit2. AS/AD Model Graphs handout?3. AP Exam Payment Handouts4. Notes: Continue LRAS5. Practice LRAS (Activity 3-8)6. Unit 2 Study Guide

Exam Thursday/FridayVocab Due Thursday

Current Event Due Friday16

LRASLRAS shows the relationship between price

level and Real GDP that would exist if ALL wages and prices were fully flexible.

Any time price level changes (inflation or deflation) wages and other input costs fully adjust.

i.e. if prices doubled and wages and other input costs doubled, there would be no overall effect.

In the LR, wages and other input costs adjust so the economy always returns to full level of employment (Natural rate = no cyclical unemployment)

LRAS curve is vertical at the full employment output level. 17

Long-Run Aggregate SupplyIn the Long Run, wages and resource prices

WILL increase as price levels increase.Example: • The firm has TR of $100 an uses $80 of labor. • Profit = $20.

What happens in the LONG-RUN if price level doubles?• Now TR=$200• In the LONG RUN workers demand higher wages to

match prices. So labor costs double to $160• Profit = $40, but REAL profit is unchanged.

If REAL profit doesn’t changethe firm has no incentive to increase output. 18

LRAS

Price level

GDPR

In Long Run, price level increases

LRAS

Long-runAggregate

Supply

QY

Full-Employment

In the long run the economy will be producing at the vertical curve which represents full employment. In the long-run, there is exactly one quantity that will be supplied.

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LRAS is independent of prices…Other factors than demand and prices influence LRAS are..LR Production is improved by changes in technology or labor productivity

Concluding LRASActual vs. Full Employment OutputRemember, Real GDP is inversely related to level of

Unemployment.Short Run Equilibrium: Only price level where

goods/services purchased by domestic & foreign buyers are equal to quantity supplied within the economy.

This equilibrium output can be less than, equal to, or greater than the full employment output.

Recessionary Gap (when in a recession) Real GDP will be less than the potential level and Unemployment Rate will exceed Natural Rate.

Inflationary Gap: (when experiencing inflation) Equilibrium Real GDP will exceed the potential level and Unemployment Rate will fall below the Natural Rate. 20

Recessionary Gap

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Inflationary Gap

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