Long-run aggregate supply | Aggregate demand and aggregate supply | Macroeconomics | Khan Academy
Summary
TLDRThis 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
📈 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.
Mindmap
Keywords
💡Aggregate Demand
💡Aggregate Supply
💡Long-run
💡Fixed Costs
💡Real GDP
💡Natural Level of Productivity
💡Frictions
💡Technological Improvements
💡Natural Rate of Unemployment
💡Sticky Prices
💡Economic Assumptions
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.
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