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Aggregate Supply

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❶Typically AS is depicted with an unusual looking graph like the one shown below.

Aggregate Supply

What is 'Aggregate Supply'?
BREAKING DOWN 'Aggregate Supply'
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Once this point is reached, supply becomes insensitive to changes in the price level. Aggregate demand is the total amount of goods and services demanded Aggregation is a principal involving the combination of all future Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services. A new front in personal finance technology—data aggregation—seeks to make our financial lives easier.

But here's why it may be stalling. Find out how the laws of supply and demand function for goods and services that are considered highly inelastic, including goods not yet discovered. Discover the four major factors that shape market trends: These areas are all linked as expected future From increasing overall supply to lowering demand, there are a few ways gas prices could drop. Loosening labor restrictions, which allows for geographic and occupational mobility, has both good and bad effects on a country and its workers.

Government regulations also influence the costs of production. What does the equilibrium between AD and AS determine? Equilibrium is illustrated below as the intersection between AD and AS. Notice that in the intermediate range, there is a tradeoff between two of the key economic variables that concern US citizens: Typically, we would like both inflation and unemployment to be low. In the intermediate range, however, if we increase AD, inflation will go up as unemployment falls notice that if real GDP is going up, unemployment is going down: On the other hand, if we decrease AD, inflation will fall but unemployment will rise.

There is no way to simultaneously decrease inflation and decrease unemployment using demand side shifts. Do you think that decreases in AD have exactly the opposite effects as the increases? Why do you think that prices would go up very easily but fall only slowly? Part of the answer has to do with the fact that it actually costs businesses money to change their prices think of printing new catalogs, printing new menus, recoding prices in a computer and on scanners, or sending a worker out to change the prices on a marquee.

It is worth it to the business to incur this expense when the price is going up, but when the price is going down they are hesitant to take on the expense of changing prices!

During the s, a variety of factors shifted the AS curve to the left. The high inflation that was combined with a stagnant economy low levels of output and high unemployment gave rise to the term Stagflation.

When Ronald Reagan was elected President in , the inflation rate was Reagan employed supply side policies that were designed to shift the AS curve to the right and reduce both inflation and unemployment simultaneously. Only by supply side policies can you decrease both inflation and unemployment at the same time. By the time that Reagan left office eight years later, the inflation rate in the economy was 4. When the AD curve intersects the AS curve in the Keynesian Range or in the Intermediate Range such that output is below Qf, there exists what is called a recessionary gap.

The gap represents the amount of government spending that would be necessary to shift the AD to the right enough to bring output to Qf. In the Keynesian Model, the magnitude of the shift in AD will depend on the size of the multiplier.

For example, if the multiplier is 2. So if the AD needs to be shifted to the right by million dollars to get to Qf and the multiplier is 2. Conversely, if the AD needs to be shifted to the left to get to Qf, there is an inflationary gap and the same multiplier principles would apply. The changes in government spending that would close an inflationary or recessionary gap are applications of fiscal policy, which is the topic of our next lesson. Course Introduction Section Introduction to Macroeconomics Introduction to Macroeconomics Section Lesson 04 Section Economic Growth in the U.

Lesson 07 Section Aggregate Supply Aggregate Supply Section Equilibrium Equilibrium Section Government Spending or Taxes? Lesson 10 Section Why are there so many interest rates? Lesson 11 Section Summary Summary Lesson 12 Section Trade Importing and Exporting Services Section Conclusion Conclusion Course Conclusion Section Aggregate Demand and Aggregate Supply Section Aggregate Demand As discussed in the previous lesson, the aggregate expenditures model is a useful tool in determining the equilibrium level of output in the economy.

The Interest Rate Effect The interest rate effect explains impact that the price level has on interest rates, and thus on certain components of AD.

Aggregate Demand Shifters The graph below illustrates what a change in a determinant of aggregate demand will do to the position of the aggregate demand curve. Changes in Consumption unrelated to a change in the price There are several factors that could increase or decrease consumption that are unrelated to changes in the price level.

Changes in Investment unrelated to a change in the price There are several factors unrelated to changes in the price level that could increase or decrease Investment and thereby shift the AD curve. Changes in Government Spending unrelated to a change in the price The political process will sometimes lead to increases or decreases in the level of government spending. Changes in Net Exports unrelated to changes in the price There are two important factors unrelated to the price level that could increase or decrease the level of Net Exports and thereby shift the AD Curve.

Aggregate Supply Aggregate Supply AS is a curve showing the level of real domestic output available at each possible price level. Determinants of Aggregate Supply The graph below illustrates what a change in a determinant of aggregate supply will do to the position of the aggregate supply curve. Changes in Productivity Independent of its price, anything that makes resources more productive will increase AS and shift the AS curve to the right; anything that makes resources less productive will decrease AS and shift the AS curve to the left.

Business Taxes and Subsidies In brief, business taxes increase the cost of production and shift the AS curve to the left; subsidies decrease the cost of production and shift the AS curve to the right.

Government Regulations Government regulations also influence the costs of production. The price increases that result from increases in AD are examples of Demand-Pull Inflation Do you think that decreases in AD have exactly the opposite effects as the increases?

Understanding Supply Side Shifters Looking back at the AS shifters, come up with what some effective supply side policies might be. Decrease in taxes 2. Expectations about the agent's own price are derived by that agent based on observations about the general price level: An equation for short-run Aggregate Supply AS can be defined as:. In time these economic agents will discover that the price of their particular good has not changed relative to the price of other goods in the economy.

These agents will discover that they have made incorrect production decisions i. In summary, the only way a change in the price level can affect supply production decisions in an aggregate economy is if the price level ' P ' exceeds that expected ' E[P] ' by individual producers. Ultimately changes in potential output are the result of changes in the available of resources or productivity and technology.

In the Long Run this ability to produce is based on the level of production technology and the availability of factor inputs.


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Determinants of Aggregate Supply. Changes in labor force: Anything that causes the amount of workers to increase in an economy will cause aggregate supply to increase or shift to the right. If the labor force decreases, the overall supply of goods and services will decrease also.

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Aggregate supply determinants are held constant when the aggregate supply curves are constructed. A change in any of these determinants causes a shift of either the short-run aggregate supply curve, the long-run aggregate supply curve, or both.

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Learn aggregate supply determinants with free interactive flashcards. Choose from different sets of aggregate supply determinants flashcards on Quizlet. Long Run Aggregate Supply Aggregate Supply represents the ability of an economy to produce goods and services. In the Long Run this ability to produce is based on the level of production technology and the availability of factor inputs. As stated earlier, production refers to the conversion of inputs -- the factors of production into desired output.

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