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.

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