Macro 3.3 &3.4 - Aggregate Supply Short Run and Long Run

Summary

In this video, Jacob Reed from ReviewEcon.com explains the concepts of short-run and long-run aggregate supply. He describes how the short-run aggregate supply curve is upward sloping, indicating a direct relationship between price levels and real GDP due to sticky wages. Various factors, including resource prices, productivity, inflation expectations, business taxes, and regulations, can shift this curve. In contrast, the long-run aggregate supply curve is vertical, representing the economy's full employment output, influenced by the quantity and quality of resources and productivity. The video provides essential insights for mastering macroeconomic concepts.

Takeaways

• 😀 The short-run aggregate supply (SRAS) curve represents the total supply of goods and services in the economy, showing a direct relationship between price levels and real GDP.
• 📈 The SRAS curve is upward sloping, indicating that higher price levels lead to increased production due to higher profits for businesses.
• 📉 Lower price levels result in reduced production as wages and resource prices remain sticky, leading to lower profits and higher unemployment.
• 💡 Shifts in the SRAS curve can occur due to changes in resource prices, productivity, inflation expectations, business taxes, and regulations.
• ⬆️ A positive supply shock, such as a decrease in resource prices, shifts the SRAS curve to the right, while a negative shock shifts it to the left.
• 🔄 The long-run aggregate supply (LRAS) curve is vertical, indicating that the economy's potential output remains the same regardless of the price level.
• ⚖️ The vertical nature of the LRAS curve is due to the flexibility of wages in the long run, allowing output to return to the full employment level.
• 📊 Shifters of the LRAS curve include changes in the quantity and quality of resources, productivity, and technological advancements.
• 🔍 Both the LRAS curve and the production possibilities curve represent the long-run potential GDP output of an economy.
• 📚 Understanding the dynamics of both short-run and long-run aggregate supply is essential for effective economic analysis and policy formulation.

Q & A

What does the short-run aggregate supply curve represent?

The short-run aggregate supply curve represents the total supply of goods and services in an economy at varying price levels, with real GDP plotted on the x-axis and the price level (CPI or GDP deflator) on the y-axis.

Why is the short-run aggregate supply curve upward sloping?

The short-run aggregate supply curve is upward sloping because wages and other resource prices are sticky in the short run. As price levels rise, businesses can earn more profit, which incentivizes them to produce more, leading to higher levels of real GDP.

What is the relationship between real GDP and unemployment according to the short-run aggregate supply curve?

There is a short-run trade-off between unemployment and inflation: when real GDP increases (due to higher prices), unemployment decreases, and when real GDP decreases (due to lower prices), unemployment increases.

What causes a rightward shift in the short-run aggregate supply curve?

A rightward shift in the short-run aggregate supply curve can be caused by a decrease in resource prices (like wages), an increase in productivity, lower inflation expectations, a decrease in business taxes, or a reduction in business regulations.

How do inflation expectations affect the short-run aggregate supply curve?

If businesses expect lower future prices, they will lower wages and production costs, shifting the short-run aggregate supply curve to the right. Conversely, if inflation expectations rise, wages and production costs increase, shifting the curve to the left.

What defines the long-run aggregate supply curve?

The long-run aggregate supply curve is vertical at the full employment level of output, indicating that in the long run, the economy's output is determined by factors such as resource availability and technology, rather than price levels.

Why do wages become flexible in the long run?

In the long run, wages are flexible and can adjust to changes in the price level. This flexibility ensures that the economy returns to the full employment level of output, regardless of short-run fluctuations.

What factors can shift the long-run aggregate supply curve?

The long-run aggregate supply curve can shift due to changes in the quantity and quality of resources, including human capital, physical capital stock, and advancements in technology.

How does a decrease in the physical capital stock affect the long-run aggregate supply curve?

A decrease in the physical capital stock will shift the long-run aggregate supply curve to the left, as it reduces the economy's ability to produce goods and services.

What is the relationship between the long-run aggregate supply curve and the production possibilities curve?

Both the long-run aggregate supply curve and the production possibilities curve represent the potential output of an economy. A shift in the production possibilities curve indicates changes in the economy's capacity to produce, which similarly shifts the long-run aggregate supply curve.