 Aggregate supply is a schedule or curve showing the relationship between the price level of output and the amount of real domestic output that firms in the economy produce  This relationship varies depending on three time horizons: The immediate short run The short run The long run 1©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

Real domestic output, GDP Price level AS ISR GDP f Immediate-short-run aggregate supply P1P1 0 2©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

 The short run begins after the immediate short run ends.  The short run is a period of time during which output prices are flexible but input prices are either totally fixed or highly inflexible. 3©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

 The upward-sloping aggregate supply curve AS indicates a direct (or positive) relationship between the price level and the amount of real output that firms will offer for sale  The AS curve is relatively flat below the full- employment output  It is relatively steep beyond the full- employment output 4©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

Real domestic output, GDP Price level 0 GDP f AS Aggregate supply (short run) 5©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

 For the economy as a whole, it is the time horizon over which all output and input prices are fully flexible  It begins after the short run ends  Price-level changes do not affect firms’ profits and thus they create no incentive for firms to alter their output. 6©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

Real domestic output, GDP Price level AS LR GDP f 0 Long-run aggregate supply 7©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

1. Change in input prices a. Domestic resource price b. Price of imported resources 2. Change in productivity 3. Change in legal-institutional environment a. Business taxes and subsidies b. Government regulation 8©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2

Real domestic output, GDP Price level AS 1 AS 3 AS 2 0 9©2013 McGraw-Hill Ryerson Ltd.Chapter 10.2