ECON 1102 Lecture Notes - Lecture 16: Aggregate Supply, Potential Output, Phillips Curve
Document Summary
Aslr in the sr inputs prices are xed ex: wages - From the short run to the long run. This gave us a short-run aggregate supply curve that is upward- sloping and a long-run aggregate supply curve that is vertical. Assume that output is at full employment when the price level is at p1. Suppose that the price level rises to p2. When prices rise, firms" revenues increase, but since wages and input prices are fixed in the short run, profits rise; this is why firms raise their output. Now the economy is operating beyond full- employment output (potential output), so unemployment falls below the natural rate. Over time, due to higher demand for labour and other inputs, wages and input prices will rise. A rise in per-unit production costs makes the short-run aggregate supply curve shift to the left, moving the economy back to full-employment output and returning unemployment to the natural rate.