Long-run aggregate supply | Aggregate demand and aggregate supply | Macroeconomics | Khan Academy

Summary

This video delves into the concept of aggregate supply, particularly in the long run, where fixed costs and contracts are flexible. It contrasts with short-term scenarios where factors like labor contracts and sunk costs affect supply. The video explains that in the long run, real GDP is independent of price levels, representing a natural level of productivity. Factors like population growth, technological advancements, and the discovery of resources can shift this level. The focus is on the production capability, assuming no changes in people's behavior, technology, or other external factors.

Takeaways

• 📈 The video discusses aggregate supply, focusing on the long-run perspective where fixed costs and contracts can change.
• ⏳ In the long-run, economists consider a time frame where labor contracts expire and factories may be replaced or renegotiated.
• 📊 Aggregate supply is plotted on the same graph as aggregate demand, with price on the vertical axis and real GDP on the horizontal axis.
• 💡 The assumption in long-run aggregate supply is that real GDP does not depend on price levels; it represents a natural level of productivity.
• 🔄 Factors such as population growth, technological improvements, and discovery of natural resources can shift the aggregate supply curve.
• 🏭 The video emphasizes that the natural level of productivity is a snapshot in time, not accounting for changes in productivity over time.
• 🌐 The model is a simplification of a complex economy, acknowledging the unpredictability of human behavior and economic factors.
• 🛠️ Technological advancements or improved job-finding tools can decrease the natural rate of unemployment, thus shifting the productivity level.
• 🌱 The discovery of fertile land or other resources can also contribute to an increase in the economy's productive capabilities.
• ⚔️相反地，战争和其他灾难性事件可能导致生产力下降，从而将生产力水平向左移动。
• 💼 In the context of aggregate supply, price changes are considered separately from the economy's ability to produce goods and services.

Q & A

What is the primary focus of the video script?

The primary focus of the video script is to discuss aggregate supply, particularly in the long-run, and how it is represented in economic models.

What does the term 'long-run' signify in economics according to the script?

In economics, the 'long-run' refers to a period of time sufficient for many fixed costs and contracts to expire, allowing for adjustments and renegotiations.

Why might a business be stuck with certain costs in the short-term?

A business might be stuck with certain costs in the short-term due to labor contracts or investments in fixed assets like factories, which have already been paid for and cannot be easily changed.

How does the long-run aggregate supply differ from short-run aggregate supply?

In the long-run, all costs are variable, and businesses can adjust their production levels freely, whereas in the short-run, some costs are fixed, and businesses may not be able to adjust their production levels as easily.

What is the assumption made by economists about real GDP in the long-run?

Economists assume that in the long-run, real GDP does not depend on prices, implying that the natural level of productivity remains constant regardless of price changes.

What factors can cause the natural level of productivity to shift?

Factors such as population increase, technological improvements, discovery of natural resources, and changes in the natural rate of unemployment can cause the natural level of productivity to shift.

How does the video script describe the relationship between price and production capability?

The script suggests that in the long-run, the price is just a numeric thing and does not affect the production capability of a country, which is determined by its resources and factors of production.

What does the narrator caution about when interpreting economic models?

The narrator cautions that economic models are oversimplifications of a highly complex system and should be taken with a grain of salt, acknowledging the unpredictability and complexity of economic actors.

Why might an increase in the population shift the aggregate supply curve to the right?

An increase in the population can shift the aggregate supply curve to the right because it increases the labor force, potentially leading to higher productivity and output.

What is the significance of the horizontal axis representing real GDP in the script's economic model?

The horizontal axis representing real GDP signifies the total output of goods and services in an economy, which is a key measure of economic performance and is used to plot the aggregate supply curve.

What does the narrator imply about the relationship between aggregate supply and aggregate demand in the long-run?

The narrator implies that while aggregate demand can fluctuate with price changes, aggregate supply in the long-run is more stable and determined by the economy's productive capacity, which is less sensitive to price changes.

Outlines

00:00

📈 Introduction to Long-Run Aggregate Supply

The narrator begins by contrasting the focus on aggregate demand in previous videos with an introduction to aggregate supply, specifically in the long-run. The long-run in economics is defined as a period where fixed costs and contracts can change, allowing for adjustments that aren't possible in the short-run due to existing commitments. The narrator emphasizes the simplifications made in economic models, acknowledging the complexity of the economy and the unpredictability of human behavior. The video aims to plot aggregate supply on the same axis as aggregate demand, with a focus on the long-run, before discussing short-run implications.

Keywords

💡Aggregate Demand

Aggregate demand refers to the total demand for all goods and services in an economy over a specific period. It is a key concept in macroeconomics and is influenced by factors such as consumer spending, business investment, government spending, and net exports. In the script, aggregate demand is mentioned in contrast to aggregate supply, highlighting the importance of understanding both to analyze economic conditions.

💡Aggregate Supply

Aggregate supply is the total supply of goods and services produced by an economy over a specific period. It is influenced by factors such as technology, labor, and capital. The script focuses on aggregate supply in the long run, which is assumed to be independent of price levels, reflecting the economy's natural level of productivity.

💡Long-run

In economics, the long run is a theoretical timeframe where all costs and contracts are flexible and can adjust to changes. The script emphasizes that in the long run, the real GDP does not depend on prices, allowing for a clearer understanding of the economy's productive capabilities without the influence of short-term factors.

💡Fixed Costs

Fixed costs are expenses that do not change with the level of production, such as rent or salaries. The script mentions that in the short term, businesses might be stuck with fixed costs, like labor contracts or factory payments, which limit their flexibility to adjust to economic changes.

💡Real GDP

Real GDP is a measure of an economy's total output adjusted for inflation, reflecting the actual value of goods and services produced. In the script, real GDP is used as a measure on the horizontal axis when plotting aggregate supply, indicating the economy's productive output.

💡Natural Level of Productivity

The natural level of productivity refers to the sustainable output level of an economy, given its resources and technology. The script describes this as a snapshot in time, unaffected by price changes in the long run, and could shift due to factors like population growth or technological improvements.

💡Frictions

Frictions in the labor market refer to the obstacles that can slow down the process of matching workers with jobs, such as job search time or the need for retraining. The script uses the term to explain that improvements in job matching could shift the natural level of productivity.

💡Technological Improvements

Technological improvements refer to advancements in technology that can increase productivity and efficiency. The script suggests that such improvements could shift the aggregate supply curve to the right, indicating a higher natural level of productivity.

💡Natural Rate of Unemployment

The natural rate of unemployment is the lowest rate of unemployment that can be expected in an economy, given frictions and structural issues. The script mentions that improvements in job matching or training could reduce this rate, thereby increasing the economy's productive capacity.

💡Sticky Prices

Sticky prices are prices that do not adjust immediately to changes in market conditions. The script discusses how in the short run, prices might be 'sticky' and not adjust quickly, affecting the economy's ability to reach its natural level of productivity.

💡Economic Assumptions

Economic assumptions are simplifications made to model complex economic phenomena. The script acknowledges the oversimplifications in economic models, such as assuming that real GDP does not depend on prices in the long run, to make the economy more tractable for analysis.

Highlights

Introduction to aggregate supply in the long-run

Definition of long-run in economics

Impact of fixed costs and contracts on short-term decisions

Opportunity in the long-run to renegotiate contracts and change investments

Plotting aggregate supply on the same axis as aggregate demand

Focus on long-run aggregate supply in the video

Explanation of price and real GDP axes in macroeconomic terms

Economic models as simplifications of complex economic realities

Assumption that real GDP does not depend on prices in the long-run

Real GDP as a measure of natural level of productivity

Snapshot in time for the natural level of productivity

Factors that can shift the natural level of productivity

Impact of population increase on productivity

Role of technology and tools in improving job finding and productivity

Technological improvements and their effect on productivity

Discovery of natural resources and its impact on aggregate supply

Effects of war on the economy and aggregate supply

Aggregate supply as a reflection of a country's productive capability

Price as a numeric factor separate from productive capability

Transcripts

Narrator: We've talked a lot about

aggregate demand over the last few videos,

so in this video, I thought I would talk

a little bit about aggregate supply.

In particular, we're going to think about

aggregate supply in the long-run.

In economics, whether it's in micro or macro

economics, when we think about long-run,

we're thinking about enough time for a lot of

fixed costs and a lot of fixed contracts to expire.

In the short-term, you might be stuck into some

labor contract, or stuck into your using some factory

that you've already paid money for, so it was a fixed

cost, but over the long-run you'll have a chance that

factory will wear down and you'll have a chance

to decide whether you want another factory or

the price of the factory might change;

or in the long-run, you'll have a chance

contracts will expire, and you'll have a chance

to renegotiate those contracts at a new price.

That's what we really mean

when we talk about the long-run.

I'm going to plot aggregate supply on the same axis

as we plotted aggregate demand, and we're going

to focus on the long-run now, and then we're going

to think about what actually might happen in the

short-run while we are in fixed-price contracts,

or we already have spent money on something,

or we have already, in some ways, there are sticky

things that can't adjust as quickly.

But, we'll first focus on the long-run.

On this axis, I'm just going to plot price, and

remember, we're thinking in macro-economic terms.

This is some measure of the prices

of the goods and services in our economy.

This axis right over here,

the horizontal axis is going to be real GDP.

Once again, this is just a model, you should take

everything in economics with a huge grain of salt.

These are over-simplifications of a highly,

highly complex thing, the economy.

Millions and millions of actors doing

complex things, human beings, each of them and

their brain have billions and billions and billions

of neurons, doing all sorts of unpredictable things.

But economists like to make

really simplifying, super-simplifying assumptions,

so that we can deal with it in a attractable way,

and in a even dealing in a mathematical way.

The assumtion that economists often make

when we think about aggregate supply

and aggregate demand is, in the long-run,

real GDP actually does not depend on prices

in the long-run; so, what you have is,

regardless of what the price is, you're going

to have the same real GDP.

You can view this as a natural level

of productivity for the economy.

This is some level right over here.

It's important to realize this is just

a snap shot in time, and this is all else things equal,

so we're not assuming that we're having changes in

productivity overtime; this is just a snap shot if

we did have any of those things that change.

For example, if the population increased, then that

would cause this level to shift to the right, then

we would have a higher natural level of productivity.

If, for whatever reason, we were able to create tools

so that it was easier to find people jobs, there's

always a natural rate of unemployment.

There's frictions, people have to look for jobs,

some people have to retrain to get their skills,

but maybe we improve that in some way so that

there's some website where people can find jobs

easier, or easier ways to train for jobs,

and the natural level of unemployment goes down,

more people can produce, that would also

shift this curve to the right.

You could have a reality where there's

technological improvements that would also,

and then all of a sudden, on an average,

people would become more productive;

that could shift things to the right.

You could have discovery of natural resources,

new land that is super fertile, and everything else;

that could also shift things to the right.

You could have a war, and maybe your

factories get bombed, or bad things happen in a war,

especially if the war is on your soil,

and that could actually shift things to the left.

So, it's important to realize that this is just taking

a snap shot in time, and a lot of these

other things that we think about would just

shift it in 1 direction or another.

I'm going to leave you there, and this is a kind of

it might not seem intuitive at first, because

you're saying, "Wait, look, if prices were to change

dramatically, if all of a sudden everything in the

economy got twice as expensive, that would have

some impact on peoples' minds and that they would

behave differently and all the rest, and that might

affect how much they can produce."

We did think a little about that when we thought

about aggregate demand, but when we think

about aggregate supply, we're just thinking

about their capability to produce.

We're saying all else equal.

We're saying that peoples' mind-shifts aren't

changing, their willingness to work isn't changing,

nothing else is changing, technology isn't changing.

Given that, price really is just a numeric thing.

If you just looked at the resources

and the productive capability of a country,

the factors of production, the people and all the rest,

regardless of what the prices are, they in theory,

should be able to produce the same level

of goods and services.