ECON102 Lecture Notes - Lecture 7: Aggregate Supply, Potential Output, Aggregate Demand

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5 Aug 2016
Department
Course
Chapter 26: Aggregate Supply and Aggregate
Demand
2016 28
9:35
Aggregate Supply
Quantity Supplied and Supply
The quantity of real GDP supplied is the total quantity that the firms plan to produce
during a given period
Aggregate supply is the relationship between the quantity of real GDP supplied and the
price level
Long run aggregate supply
Short run aggregate supply
Long-run Aggregate Supply
Relationship between the quantity of real GDP supplied and the price level when real
GDP=potential GDP
Potential GDP is independent of the price level
oPotential GDP does not depend on the price level
LAS is vertical at potential GDP
LAS is vertical because it does not depend on the price level, price level can go up or
down but it does not affect the output
Short-run Aggregate Supply
Is the relationship between the quantity of real GDP supplied and price level when the
money wage rate, the prices of other resources and potential GDP remain constant
A rise in price level with no change in the money wage rate and other factor prices
increases the quantity of real GDP supplied
SAS is upwards sloping
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As the price level rises and the money wages rate changes by the same percentage, the
quantity of real GDP supplied remains at potential GDP (LAS)
Long run-capable of producing, depends of real things e.g. FOP
oCapable of producing=Real GDP=Potential GDP
Short-run-relevant price for firms is the money wage
oWages are usually fixed in the short run, if prices go up, firms will have the
incentive to produce more (explains the curve)
Aggregate Supply
Short Run
With a given money wage rate, as the price level falls the quantity of real GDP supplied
decreases along the SAS curve
oSAS cuts LAS at potential GDP
Long run
With the given money wage rate, as the price level rises above, the quantity of real GDP
supplied increases along the SAS curve
oReal GDP exceeds potential GDP
Changes in Aggregate Supply (what will shift the curve)
Aggregate supply changes if an influence on production plans other than the price level
changes
oChanges in potential GDP
oChanges in money wages rate and other factor prices
Changes in Potential GDP
When potential GDP increases both the LAS and SAS curve will shift RIGHTWARDS
Increases if
oFull employment quantity of labour increases
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