Aggregate Supply Curve Concepts

Study Notes

Aggregate Supply Curve Concepts

The long-run aggregate supply (LRAS) curve is vertical, indicating that potential GDP is unaffected by price level changes; it depends on labor force size, capital stock, and technology.
An increase in capital accumulation shifts the LRAS curve to the right, indicating growth in productive capacity.

Short-Run Aggregate Supply (SRAS)

The short-run aggregate supply (SRAS) curve slopes upward due to slow adjustments in input prices, leading to increased sales for firms when final goods prices rise, and costs such as menu costs delaying price changes.
The SRAS curve shifts right with increases in labor force, capital accumulation, productivity, and technological advancements.
The SRAS curve shifts left with higher expected prices of key natural resources, and via adjustments to prior underestimations of price levels or expected future prices.

Price Level Effects

Changes in the price level affect movement along the SRAS curve rather than shifting it; increases in the price level alone do not change the SRAS curve.
An increase in expected future prices decreases (shifts left) the SRAS curve, reflecting new expectations about future prices.

Labor Force and Capital

An increase in labor force shifts the LRAS right due to enhanced productive capacity.
An increase in capital goods also results in a rightward shift of the LRAS, reflecting improved production capability.
Technological changes similarly lead to a rightward shift in the LRAS, signifying advancements in productivity.

Price Expectations and Supply Shifts

Misestimations of future price levels, sticky wages, and adjustment times contribute to the upward slope of the SRAS curve.
Supply shocks, such as sudden changes in important raw material prices, can unexpectedly shift the SRAS curve leftward.

Incorrect Assumptions

The economy's potential supply scenarios that incorrectly consider expected price levels to impact LRAS are flawed since they primarily affect SRAS.

Summary of Effects

An increase in current price levels doesn't shift the SRAS; it leads to movements along the existing curve.
Unexpected increases in important commodity prices shift the SRAS left, indicating rising costs affecting firms’ supply decisions.

Description

Explore the essential concepts of Aggregate Supply, including the distinctions between Long-Run and Short-Run Aggregate Supply curves. Understand how factors like capital accumulation and price levels impact these curves and overall economic productivity.