Skip to main content

Macroeconomics: determinants of aggregate supply

Determinants of aggregate supply:
  • In the short run, a change in AD will cause output to change and price level to change.
  • In the long run a change in AD will result in a change in price level only.
Shifts in SRAS:
  • The SRAS will shift to the left if there an increase in the costs of productions. This includes:
    • A wage increase, this can be achieved by strong labor unions, higher minimum wage, and a decrease in the labor force.
    • An increase in business taxes will increase costs, thereby shifting the SRAS to the left.
    • A general increase in input costs. Just as the previous point, this will increase the cost of production, shifting the SRAS to the left.
    • An increase interest rates, it is more expensive to replace machines (K), this will push to SRAS to the left.
  • An increase in costs of production is known as a negative supply shock, which causes the SRAS curve to shift to the left, increasing the equilibrium price level, and reducing the equilibrium output.

  • The SRAS will shift to the right if there is a reduction in the costs of productions.
    • lower wages, and lower input costs in general.
    • Lower business taxes
    • Lower interest rates
  • A decrease in the costs of production is known as a positive supply shock, which shifts the SRAS to the right, causing the level of output to increase and the equilibrium price level to decrease.
  • The LRAS shifts  any time there is an increase in the factor of production, or the factor of production become more productive.
    • Increase in labor force: an increase in population growth, immigration, or lowering the NRU. 
    • An increase in land resources, through territorial expositions or military conquest.
    • An increase in capital stock (i.e machines) which results from investments.
  • The factors of productions become more productive when:
    • A better educated and more skilled labor force.
    • Improvement in the quality of land resources, for example, increasing the agricultural yields.
    • An improvement in capital caused by technological innovations.
  • A decrease in LRAS result from the following:
    • A decrease in the size of the population, or the size of the labor force.
    • Reduction in land resources.
    • Reduction of capital stock caused by higher interest rates, wars, or natural disasters.
    • A deterioration of the nation's infrastructure or education system.
  • This list above will reduce the level of full-employment output in a nation over time and shift the LRAS to the left.
Reference: Welker, Jason. AP Maroeconomics Crash Course. Research & Education Association (2014). p 130-134.
    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: inflation and GDP deflator

    You have the following table containing information about country Y's GDP deflator, nominal, and real GDP. If the base year is 2015, fill in the blanks and then find the annual inflation rate for each year. Year  Nominal GDP  GDP Deflator  Real GDP 2015 $23,457 100 $23,457 2016 $25,752 ... $23,943 2017 $25,982 108.1 ... 2018 $26,016 ... $25,431.1 2019 $26,323 105.5 ... Solution: Year  Nominal GDP  GDP Deflator  Real GDP   Inflation rate 2015 $23,457 100 $23,457 n.a 2016 $25,752 107.6 $23,943 7.6% 2017 $25,982 108.1 $24,035.2 0.45% 2018 $26,016 102.3 $25,431.1 -5.37% 2019 $26,323 105.5 $24,950.6 3.13%  GDP deflator for the year 2018: Real GDP for the year 2017: General formula to find real GDP by re-arranging the GDP deflator formula: Notice that the sub-index i is for the year. The (annual) inflation rate is simply the growth rate of prices from a year to its previous year: Inflation rate of the year 2018: Notice that in 2018 country Y experienced...
    Post a Comment
    Read more

    Microeconomics: Factor Markets

    Definition: Factor markets: markets for the factors of production (example: labor and capital). Markets are formed whenever consumers and producers meet to exchange goods or services. Deriving factor demand: the demand for goods or services in the product markets creates demand for the factors of production.  An increase (decrease) in demand for good X leads the suppliers to increase their production thereby increasing (decreasing) the demand for the factors of production.   Marginal revenue product: The demand for the factor of production is formed by multiplying a firm's marginal revenue by its marginal product.  Remember that by taking the derivative of the TR function with respect to Q we are able to find the MR. Marginal product on the other hand is found by taking the derivative of the production function with respect to a factor of production (L or K for example). Marginal revenue product (MRP): the change in total revenue when one more input is employed. It decrea...
    Post a Comment
    Read more