Long run v Short run
Long run:
- period of time where input prices ar completely flexible and adjust to changes in the price-level
- In the long run, the level of Real GDP supplied is independent of the price-level
Short run:
- period of time where input prices are sticky and do not adjust to changes in the price level
- In the short run, the level of Real GDP supplied is directly related to the price level
Long-Run aggregate supply (LRAS)
- The Long-Run aggregate supply or LRAS marks the level of full employment in the economy (analogous to PPC)
Short-Run Aggregate Supply (SRAS)
- Because input prices are sticky in the short-run, the SRAS is upward sloping.
Changes in SRAS
- An increase in SRAS is seen as a shift to the right. SRAS -->
- A decrease in sRAS is seen as a shift to the left. SRAS <--
- The key to understanding shifts in SRAS in per unit cost of production
Per unit production cost= total input cost/ total output.
Determinants of SRAS (all of the following affect unit production cost):
Input prices
- Domestic Resource Prices
- Wages (75% of all business cost)
- Cost of Capital
- RAW Materials (commodity prices)
- Foreign Resource Prices
- Strong $ = lower foreign resource prices
- Weak $ = higher foreign resource prices
- Market Power
- Monopolies and cartels that control resources control the price of those resources.
- Increases in Resource Prices = SRAS <--
- Decreases in Resource Prices = SRAS -->
Productivity
- Productivity= total output/ total input
- More productivity= lower unit production cost = SRAS -->
- Lower productivity = higher unit production cost = SRAS <--
Legal-Institutional Environment
- Taxes and Subsidies
- Taxes ($ to government) on business increase per unit production cost = SRAS <--
- Subsisdies ($ from government) to business reduce per unit production cost = SRAS -->
- Government Regulation
- Government regulation creates a cost of compliance = SRAS <--
- Deregulation reduces compliance costs = SRAS -->
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