Aggregate Supply

Aggregate Supply total value of all g/s produced in economy in time period
Supply-side shocks factors cause changes on cost of production
Factors that shift Short-Run Aggregate Supply
- Change in wage rates
- Change in cost of raw materials
o Change in P of M
- Change govt indirect taxes or subsidies
Long-run Aggregate supply
New classical/neo-classical economist LRAS (economist has belief in efficiency of market forces +
believe should be minimum govt intervention in allocation of resources)
LRAS curve perfectly inelastic at full employment level of output output produced if econ
operating at full capacity
Potential output based entirely on quantity and quality (productivity) of FOPs not on price level
thus independent of price level
Keynesian AS regions 1, 2, and 3
1) Perfectly elastic low levels econ activity
a. Producers raise level of output w/o incurring higher AC b/c spare capacity
2) As approaches potential output, spare capacity used up, FOPs become more scarce
a. Increasing production bid for more scarce resources
b. Higher costs leads to higher prices
3) Economy reaches full capacity impossible increase output further b/c all FOPs fully employed
a. Perfectly inelastic
b. Output not increased w/o improvement in quantity or productivity of FOPs












Shifts in LRAS (shift in productive potential linked to PPC)
- Change in quantity/productivity of FOPs
o Land
Quantity: Land reclamation, discovery new resources, increased access to S
of resources
Quality: Technological advancements allow increased access/discovery of
resources, fertilisers, irrigation
o Labour/Entrepreneurship
Quantity: Increase in birth rate, immigration, decrease in natural rate of UnE
Quality: Education, training
o Capital
Quantity: Investment
Quality: Technological advancements, R+D