Aggregate Supply: Introduction and Determinants AP Economics Mr. Bernstein Module 18: Aggregate Supply: Introduction and Determinants March 10, 2015

AP Economics Mr. Bernstein Aggregate Supply: Intro and Determinants Objectives - Understand each of the following: How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy What factors can shift the aggregate supply curve Why the aggregate supply curve is different in the short run from in the long run

AP Economics Mr. Bernstein Aggregate Supply The relationship between aggregate price level demand and the aggregate quantity of output supplied In the short run, SRAS is upward sloping In the long run, LRAS is vertical at potential GDP

AP Economics Mr. Bernstein The Short-Run Aggregate Supply Curve If the price of a unit of output is rising faster than production costs, supply will rise Why? Some input prices are sticky, particularly wages, so as prices rise profits go up in the short run

AP Economics Mr. Bernstein AS Curve Shifters D Commodity Prices D Nominal Wages D Productivity (Increase in AS is a shift “right” and decrease in AS is a shift “left”)

AP Economics Mr. Bernstein The Long-Run Aggregate Supply Curve What if wages were flexible and followed prices? Prices would rise, so would wages, and supply would not move In Long Run, wages are flexible, so LRAS is vertical At Potential GDP YP

AP Economics Mr. Bernstein From Short-Run to Long-Run Supply Curve AD/AS model predicts SRAS will shift until it intersects with LRAS at YP Example: labor