Step 15: LRAS and SRAS

Aggregate Supply

-The level if Real GDP that firms will produce at a each price level

Long and Short Run

Long Run:
-The period of time where input prices are completely flexible and adjust to changes in price level
-Real GDP level supplies is independent of price level

Short Run:
-The period of time where input prices are sticky and do not adjust to changes in price level
-In the short-run, the level of real GDP supplied is directly related to the price level

Long-Run Aggregate Supply (LRAS)

-The LRAS marks the level of full employment in the economy (analogous to PPC) because input are completely flexible in the Long Run, change in price level do not change firms' real profits and therefore do not change firms' level of output. This means that the LRAS is vertical at the economy's level of full employment (FE)

Short-Run Aggregate Supply (SRAS)

-SRAS is upward sloping because input is sticky. Reflects the fact in the short run, input prices increase
-Change in SRAS: an increase shifts that graph to the right and vice versa.
-The key to understanding shifts in SRAS is per unit cost of production
-Formula for Per-Unit Production Cost= total input cost/total output cost

Determinants of SRAS

1. Input Prices
   -Domestic
   ~Wages - 75% of was employers payout
   ~Raw Materials
   ~Cost of Capital
   -Foreign Resource Prices
   ~Strong Dollar = lower foreign resource prices
   ~Weak Dollar = higher foreign resource prices
   -Market Power
   ~Monopolies and cartels that control resources and control the price of those resources
   ~Increases in resource prices = SRAS shifts to the left
   ~Decreases in resources prices = SRAS shifts to the right
   
2. Productivity
   -More productivity = lower unit production cost = SRAS shifts right
   -Lower productivity = higher unit production cost = SRAS shifts left
   -Formula: total output/ total input
   
3. Legal-Institutional Environment
   -Taxes and Subsidies
   ~taxes (money to government) on business increase per unit production cost = SRAS shifts left
   ~subsidies (money from government) on business reduce per unit production cost = SRAS shifts right
   -Government regulation
   ~Government regulation creates a cost of compliance = SRAS shifts left
   ~Deregulation reduces compliance cost = SRAS shifts right