Supply review the following: 1. Why does the AD curve have a - PDF document

AP Aggregate Supply.notebook December 22, 2015 Warm Up: With a partner, Supply review the following: 1. Why does the AD curve have a negative slope? 2. What causes the AD curve to shift? Feb 11­7:33 AM Feb 9­1:59 PM Aggregate Supply Aggregate Supply the amount of goods and services (real GDP) that we will produce at all price levels Feb 9­1:59 PM Feb 9­2:19 PM Phases of the AS Curve The Aggregate Supply curve is a little AS different.... PL Full employment AS PL Wages are "sticky"; approaching full employment Keynesian range - Real GDP Recession Real GDP Feb 9­2:01 PM Feb 9­2:15 PM 1

AP Aggregate Supply.notebook December 22, 2015 We essentially have two different aggregate supply curves: Short Run Aggregate Supply Long­Run Aggregate Supply Short­Run Aggregate Supply Wages and resource prices will NOT increase PL PL immediately as price levels increase LRAS SRAS Long Run Aggregate Supply Wage and resource prices WILL increase immediately as price levels increase Real Real GDP GDP Feb 9­2:18 PM Feb 9­2:26 PM In the SHORT RUN, wages and prices will NOT PL increase as price levels increase. SRAS Example: ­ A firm currently makes 100 units that are sold for $1 each. The only cost is $80 in labor. How much is the profit? $100­$80 = $20 What happens in the SHORT­RUN if price level doubles? 100 units now sell for $2 each = $200 Real GDP Profit is now $120 With higher profits, the company has the incentive to increase production. Feb 9­2:30 PM Feb 9­2:42 PM In the LONG RUN, wages and resource prices WILL PL LRAS increase as price level increases. Example: ­ A firm currently makes 100 units that are sold for $1 each. The only assumed to cost is $80 in labor. be full How much is the profit? $100­$80 = $20 employment What happens in the LONG­RUN if price level doubles? output 100 units now sell for $2 each = $200 Real In the LONG RUN, employees will demand higher wages to match GDP prices, so labor costs double to $160 Profit is now $40, but REAL profit remained the same. There is no incentive to increase output. . Feb 9­2:34 PM Feb 9­2:42 PM 2

AP Aggregate Supply.notebook December 22, 2015 Shifters of Aggregate Supply • żhangeĐinĐInflationaryФxpectationsĐ IfĐanĐincreaseĐinĐź�ĐleadsĐpeopleĐtoĐexpectĐhigherĐpricesĐinĐ ĐĐĐĐĐtheĐfutureŐĐThisĐincreasesĐlaborĐandĐresourceĐcostsĐandĐĐĐ ĐĐĐĐĐdecreasesĐźSŐĐĐ ĽIfĐpeopleĐexpectĐlowerĐprices…ľ żhangeĐinĐResourceĐPrices PricesĐofĐ�omesticĐandĐImportedĐResourcesĐ ĽIncreaseĐinĐpriceĐofĐżanadianĐlumber…ľ Ľ�ecreaseĐinĐpriceĐofĐżhineseĐsteel…ľ SupplyĐShocks ĽNegativeĐSupplyĐshock…ľ ĽPositiveĐSupplyĐshock…ľ Feb 9­2:44 PM Feb 9­2:45 PM • żhangeĐinĐźctionsĐofĐtheĐGovernmentĐ ĽNOTĐGovernmentĐSpendingľ TaxesĐonĐProducersĐĐ ĽLowerĐcorporateĐtaxes…ľ SubsidiesĐforĐ�omesticĐProducersĐĐ ĽLowerĐsubsidiesĐforĐdomesticĐfarmers…ľ GovernmentĐRegulationsĐĐ Ľ¤PźĐinspectionsĐrequiredĐtoĐoperateĐaĐfarm…ľ • żhangeĐinĐProductivity TechnologyĐ ĽżomputerĐvirusĐthatĐdestroyĐhalfĐtheĐcomputers…ľ ĽTheĐadventĐofĐaĐteleportationĐmachine…ľ Feb 9­2:54 PM Feb 9­2:42 PM 3