ECON 2030 Lecture Notes - Lecture 22: Aggregate Supply, Menu Cost, Microeconomics
4/12/18 ECON-2030 Lecture 22- Chapter 33: Aggregate Demand and Aggregate Supply (cont.)
Why the LRAS (Long run aggregate supply) Curve Might Shift
● Changes in natural resources
○ Discovery of new mineral deposits
○ Reduction in supply of imported oil
○ Changing weather conditions that affect agricultural production
● Changes in technology
○ Productivity improvements from technological progress
Three Theories of SRAS
● Theories that explain why the AS curve slopes upward in short-run:
○ Sticky wage theory
○ Sticky price theory
○ Misperceptions
● In each, some type of market imperfection: output deviates from its natural rate when
actual price level deviates from the price level expected
1. Sticky-Wage Theory
● Imperfection:
○ Nominal wages are sticky in the short run, they adjust sluggishly
○ This is due to labor contracts, social norms
○ Firms and workers set the nominal wage in advance based on PE (expected price)
, the price level they expect to prevail
● If P > PE,
○ Revenue is higher, but labor cost is not
○ Production is more profitable, so firms increase output and employment
○ Hence, higher P causes higher Y, so the SRAS curve slopes upward
Document Summary
4/12/18 econ-2030 lecture 22- chapter 33: aggregate demand and aggregate supply (cont. ) Why the lras (long run aggregate supply) curve might shift. Changing weather conditions that affect agricultural production. Theories that explain why the as curve slopes upward in short-run: In each, some type of market imperfection: output deviates from its natural rate when actual price level deviates from the price level expected: sticky-wage theory. Nominal wages are sticky in the short run, they adjust sluggishly. This is due to labor contracts, social norms. Firms and workers set the nominal wage in advance based on pe (expected price) , the price level they expect to prevail. Revenue is higher, but labor cost is not. Production is more profitable, so firms increase output and employment. Hence, higher p causes higher y, so the sras curve slopes upward: the sticky-price theory. Many prices are sticky in the short-run. This is due to menu costs, costs of adjusting prices.