ECON C

5
TH
MARCH 201 3
Aggregate Supply
Aggregate supply (AS)
Total output of goods and services in an economy
over a given period of time
Aggregate of all the supply in the economy
All industry supply curve
Relationship between price level and real output
Influenced by productivity, investment availability
and efficiency of factors of production and
government supply side policies
Short run aggregate supply curve(SRAS)
Upward sloping
Why is SRAS
upward sloping?
Higher prices
more producers
will be willing to
supply.
incurred higher
costs, workers
overtime, cost of
resources
Shifts in SRAS
Changes in wages
Changes in the price
of raw materials
Changes in taxation
Long run Aggregate supply curve
Keynesian
classical
Classical (Monetarist) view
LRAS is vertical
No spare capacity in
the economy
Spare capacity: Spare
capacity measures the
extent to which an
industry, or economy
is operating below the
maximum sustainable
level of production
Keynesian view
P
h
a
s
e

1 AS is perfectly
elastic because
there is low
level of activity
and spare
capacity. High
level of
unemployment
and factors of
production
P
h
a
s
e

2
As economy
approaches Yf,
factors of
production
become
increasingly
scare. Higher
prices have to
be paid which
will lead to
increase in price
levels
P
h
a
s
e

3
Once economy
reaches full
capacity i.e. Yf.
All factors of
production are
fully employed
and hence
LRAS is
perfectly
inelastic. Only
prices will
increase
Shifts in LRAS
All factors which improves the productivity of factors of productions
such as..
Technological advances
Increase in quantity of labor
Increase in quality of labor (productivity)
Increase in quantity and quality of resources, specially capital
Discovery and development of new resources
Government supply side policies
Equilibrium level of output
The short run equilibrium level of real output and
price occurs where aggregate demand equals
aggregate supply in the economy
Equilibrium using Classical LRAS curve
Where production actually takes
place in the economy and the LRAS
shows potential level of production
of the economy
Both levels of output are the same
at OY the economy has achieved
long run equilibrium level of output
A rise in AD will cause an increase in
price level of the country.
AD cure shifts from AD1 to AD2, price level
rises from P1 to P2.
But real GDP does not increase.
Because the LRAS curve shows the
maximum productive capacity of the
economy
Increase in AD will initially increase
the short run AS, however due to lack
of resources the AS will continue to fall
until the long rum equilibrium level is
reached
Keynesian economist argument
The difference between actual level of real output and
the potential level of output is known as output gap
Levels of real output between 0 and Y3
Up to point A , the AD curve can shift
to the right without the price level
rising (large increase in output with no
rise in the price level)
At every point where an AD cure cuts
LRAS curve is an equilibrium point
A shift to AD2 real output will still rise,
but the price level will also rise (some
spare capacity)
Above point B, is vertical.
Economy has reached full employment
level of real output, any rise in AD will be
inflationary.
Shift from AD3 to AD4 will result in no
increase in real output, but price level will
rise from P3 to P4
Thank you