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: equilibrium in the AD/AS model

    Real output and price level in the AD/AS model: The short run equilibrium in the AD/AS model, is when the  intersection between the short run aggregate supply curve and the aggregate demand curve determines the level of output and price level.          This short equilibrium output can be compared to the full-employment (i.e long run equilibrium) output by adding the long run aggregate supply curve in the graph.  If the difference between the short run equilibrium output and full employment output is negative than we have a recessionary gap. This could be caused by a decrease in households' consumption, a fall in private investments, or a decrease in government spending. If the difference is positive, we have an inflationary gap, where the short run equilibrium output is bigger than its full employment output. This can be caused by an increase in households expenditures, expansionary fiscal policy, etc... If the gap is zero, this means that t...
    Post a Comment
    Read more

    Microeconomics: Firms and cost in the short run

    In Economics, the term short run refers to a time period where at least one variable of interest does not change . In our case, the short run for a firm is when at least one input  (labor, land, capital) stays fixed. Usually land and capital are considered fixed in the short run.  If an input is fixed during a period time, no matter how much the total product a firm produces, its cost stays the same. This cost is commonly known as fixed cost (FC). Examples of fixed costs: rent, property taxes, loan payments. Labor is often considered to be a part of the  variable cost (VC) . Variable cost can be defined as the cost a firm has control over during the short run. Unlike fixed cost, variable cost increases (decreases) as a firm's total product increases (decreases). Examples of variable costs include: utility bills, wages, raw materials A firm's total cost (TC) is the sum of its variable and fixed costs. As you can see, the fixed cost...
    Post a Comment
    Read more

    Macroeconomics: balance of payments accounts

    Balance of payment is the sum of three separate accounts and must always be equal to 0 (given no statistical error): Current account: the net flow of funds exchanged for goods and services, and monetary gifts  that flow in and out of a country. This is often used as an indicator for net export. Financial account: also known as the capital account, is the net flow of funds for investment in real assets (direct investments) or financial assets (stocks or bonds) into a nation. Official reserves: in order to balance the two accounts above, a country must have a reserve of foreign money. It measures the net effect of all money flows from the other accounts. If the current account is positive, it must be the case that the sum of the financial account and official reserves is negative. Current account (CA) components: Balance of trade in goods: spending by consumers and firms on imported and exported goods. Exported goods have a positive effect on the current account, whereas importe...
    Post a Comment
    Read more