SLIDE 2 AP Aggregate Supply.notebook 2 December 22, 2015
Feb 92:18 PM
We essentially have two different aggregate supply curves:
PL Real GDP SRAS PL Real GDP LRAS
ShortRun Aggregate Supply LongRun Aggregate Supply
Feb 92:26 PM
Short Run Aggregate Supply Long Run Aggregate Supply
Wages and resource prices will NOT increase immediately as price levels increase Wage and resource prices WILL increase immediately as price levels increase
Feb 92:30 PM
In the SHORT RUN, wages and prices will NOT increase as price levels increase. 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 Profit is now $120 With higher profits, the company has the incentive to increase production.
Feb 92:42 PM PL Real GDP SRAS Feb 92:34 PM
In the LONG RUN, wages and resource prices WILL increase as price level increases.
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 LONGRUN if price level doubles? 100 units now sell for $2 each = $200 In the LONG RUN, employees will demand higher wages to match 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 92:42 PM
PL Real GDP LRAS
assumed to be full employment
