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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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