Skip to main content

Macroeconomics: aggregate supply-long-run analysis-

  • Long-run aggregate supply (LRAS) refers to the level of output of a nation's producers in response to a change in the price level in a period of time over which wages  and other costs of production are flexible.
  • In the long-run, workers will demand higher wages caused by an increase in aggregate demand and inflation, or will take lower wages in response to a decrease in aggregate demand, deflation, and rising unemployment.
  • In the long-run, output will return to its full-employment level as the costs of production adjust to the level of demand in the economy.
    • The LRAS curve is vertical and intersects the AD curve at its full employment level (NRU).
    • This reflects the idea that labor market has settled into equilibrium, there is a quantity of goods produced in the economy, that is independent of the price level.
    • Any change in the AD will not effect the national output, it will only effect the level of inflation/ deflation.
  • A fall in AD is caused by a decrease in the following variables C,I,G,or Xn. In the long run, a fall in AD only causes deflation, it does not affect GDP or employment level. Response to the falling AD, firms lower the wages of their workers and reduce the price of their goods.
  • A rise in AD causes inflation but does not affect the level of production or the level of employment in the economy. In response to the rising demand for the goods and services, firms need to increase the wage rate in order to attract new workers and increase production.
  • The LRAS curve can shift to the right if there is an increase in capital (I), population growth, a drop in the NRU level, or a change in technology. Keep in mind that if there is less capital, a smaller population, or an increase in the NRU, the LRAS can shift to the left.
Reference: Welker, Jason. AP Maroeconomics Crash Course. Research & Education Association (2014). p 127-129.
Labels:
Location: New York, NY, USA

Comments

Post a Comment

Popular posts from this blog

Macroeconomics: multiplier and crowding out effects

Multiplier effect: whenever   any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP).  Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...
Post a Comment
Read more

Exercise: maximizing profit

Assume that you are the owner of a small business that produces T-shirts. Your the total revenue for your business can be modeled by the following equation: and your total cost corresponds to this function: Find the point at which your firm maximizes its profit. Then, find how much profit the firm if able to earn at that point. Using the total cost and total revenue functions we can set up the profit function: Then, realize that if you want to find the maximum profit, take the derivative of the function and set it up equal to zero, and solve for Q. This is equivalent of taking the derivative of the total cost and total revenue functions and setting them equal to each other. In this problem, I chose the latter option as it was explained in the previous lessons. Notice that profit is often denoted by a capital pi.  We are assuming that the TR>TC for some positive value, you can check for yourself. However, if we did not know that, we would first take the first ...
Post a Comment
Read more

A short interlude...

Hello all, it's been quite some time since I have made any major announcements since the creation of this blog about a year and a half ago. I am currently in graduate school and will soon take a portion of my comprehensive examination (i.e exams in Micro, Macro, and Metrics that will allow me to continue my studies in my graduate program), wish me luck! Thus, I will not be able to post consistently until at least mid-June. The roadmap is as such, if I pass, I will start introductory lessons in Econometrics and Statistics (if not, then I'll have to study until I can retake the comps in August). I hope that once I am done, I will be able to add more advance materials to the blog, such as general equilibrium, indirect utility functions, and game theory/mechanism design for Micro. The Solow, Ramsey, RBC, New Keynesian models, permanent income hypothesis (PIH) and more for Macro. By the way I think I still need to add notes on the IS-LM curves, so I will do that before jumping to t...
Post a Comment
Read more