MGEB06H3 Lecture Notes - Lecture 6: Price Level, Aggregate Supply, Output Gap
Macroeconomics Notes: Lecture Six/Seven (Chapter Twelve) Part 2:
Aggregate Supply (AS)
• The aggregate supply (AS) curve represents the quantity of output that producers are willing
to supply at each aggregate price level.
• There are two types of aggregate supply – one for the short run and one for the long run.
The Short-Run Aggregate Supply Curve (The SRAS Curve):
• In macroeconomics, prices and wages are sticky in the short run. In particular, they are sticky
downward.
• Nominal wages is the dollar amount of the wage paid.
• Sticky wages are nominal wages that are slow to fall even in the face of high unemployed and
slow to rise even in the face of labour.
• Assumption: Holding all else constant, producers are willing to supply more goods and
services in the short run when the aggregate price increases.
The short-run aggregate supply (SRAS) curve is upward sloping.
• In generic form: SRAS: P = a + bYW
W
̅
̅
̅
,
• Factors that affect producers’ willingness to supply other than Y & P will shift the SRAS
curve.
• Producers’ willingness to supply is determined by their per-unit profit:
=Per-unit profit = Per-unit output price – Per-unit production cost.
The Long-Run Aggregate Supply Curve (The LRAS Curve)
• In macroeconomics, prices and wages are flexible in the long run.
• The economy’s long-run level of output is determined by the aggregate production function.
(Chapter 9)
• YP = YFE = A F(K, L, H), where YP = potential output and YFE = full-employment level of
output
• Therefore, change in the aggregate price level DOES NOT affect the quantity of aggregate
supplied in the long run.
The long-run aggregate supply curve is vertical.
Short-Run Equilibrium vs. Long-Run Equilibrium
• The short-run equilibrium refers to the situation in which the aggregate demand equals to the
aggregate supply in the short run.
SR equilibrium: AD intersects SRAS.
• The long-run equilibrium refers to the situation in which the short-run equilibrium is on the
LRAS curve. In the long run, Y must equal to YFE.
LR equilibrium: AD, SRAS and LRAS intersect at the same point.
Output Gap
• It is possible for the short-run level of output (Y* = YSR) to be different than the long-run level
of output (YFE).
• Output gap is the percentage differene between acyual aggregate output and potential output.
• If this is the case, the economy has an output gap.
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Document Summary
Macroeconomics notes: lecture six/seven (chapter twelve) part 2: The short-run aggregate supply curve (the sras curve): In macroeconomics, prices and wages are sticky in the short run. The short-run aggregate supply (sras) curve is upward sloping. In generic form: sras: p = (cid:4666)a + by(cid:4667)(cid:4672)ww (cid:4673): factors that affect producers" willingness to supply other than y & p will shift the sras curve, producers" willingness to supply is determined by their per-unit profit: =per-unit profit = per-unit output price per-unit production cost. The long-run aggregate supply curve (the lras curve: the economy"s long-run level of output is determined by the aggregate production function. The long-run aggregate supply curve is vertical. Long-run equilibrium: the short-run equilibrium refers to the situation in which the aggregate demand equals to the aggregate supply in the short run. Sr equilibrium: ad intersects sras: the long-run equilibrium refers to the situation in which the short-run equilibrium is on the.