AGGREGATE SUPPLY
With Mrs. Eskra
OBJECTIVES:
What will you learn?
• What Aggregate Supply (SRAS and LRAS)
are and what they look like.
• Difference between SRAS and LRAS.
• How LRAS can move to change our
country’s production capabilities.
AS/AD Model
The x-axis represents
quantity as in
microeconomics, but
OVERALL quantity in an
economy (real GDP).
The y-axis represents the
overall price level, not just
price of specific item.
This is the most common graph
that shows overall
(macroeconomic) activity.
Aggregate Supply
Aggregate Supply
Relationship between the price
level and the total amount (of
real GDP) producers are willing
to produce.
This relationship changes over
time, so we need to distinguish
between the short run and the
long run.
SRAS
Short-run aggregate supply is assumed
to maintain the positive price and
quantity correlation;
more can be produced through increased
resource utilization, technological
improvements or other factors.
SRAS is an upward sloping curve.
Aggregate Supply
(SRAS)
Positive relationship between
the price level and the total
amount (of real GDP)
producers can produce.
In the short run, businesses
can produce more as prices
rise:
-Won’t have to pay workers
more immediately.
-Can use their inventories.
This is why it is possible for AS to slope
upwards in the short run.
Aggregate Supply
(SRAS)
Think about it this way:
You can pull an “all-nighter”
to cram for an exam or get
your house ready to entertain
the next day. This way you
can accomplish more than
normal.
Would this level of activity be sustainable for
you, night after night, indefinitely?
Aggregate Supply
(SRAS)
Think about it this way:
If employers want to take
advantage of higher prices in
the short run, they can hire
workers to work overtime
and draw down their
inventories to produce more
right now.
At some point, though, there is a limit to the
amount of resources (land, labor, and capital).
What will Shift SRAS?
• Anything that will help producers supply
more will increase SRAS in the economy,
like:
– Excellent weather
– Natural resources
– Labor force productivity / education
– Reduced costs to firms
What will Shift SRAS?
• Anything that will make if more difficult for
producers will decrease SRAS in the
economy, like:
– Natural disasters / bad weather
– Labor force changes, like an aging population or
lack of education
– Increased costs to firms
LRAS
Long-run aggregate supply is
assumed to be constant in the longrun as in the long-run resources are
assumed to be used optimally,
leaving no potential for increasing
capacity.
LRAS is a vertical curve.
Aggregate Supply
(LRAS)
This LRAS curve represents
our economy’s full
potential in terms of
production, given our
current resources.
This amount of production
is possible when resources
are fully employed (zero
cyclical unemployment).
So our production capacity is fixed unless something
changes to increase our ability to produce more.
Aggregate Supply
(LRAS)
Ramping up our production
in the short run can only
get us so far. In the long
run we have a limited
amount of resources
(materials, workers, etc).
In the long-run, then, the
amount of production that
producers can sustain is
fixed.
So our production capacity is fixed unless something
changes to increase our ability to produce more.
SUSTAINABILITY
Consumption and production that
does not stress or exceed the
threshold required for natural
regeneration of depleted resources.
Aggregate Supply
(LRAS)
Example:
If many producers use our
resources (like timber)
faster than these resources
are being replaced, this rate
of growth is unsustainable.
So how does our economy grow over time, then?
LRAS can move!
Over time, it is possible for
the economy to grow.
We must find more land,
labor or capital:
-Population changes (greater
amount of people in
workforce)
-Discover new resources
-Advance technology
These changes would shift
out our LRAS, giving us the
ability to produce more into
the long run.
LRAS can move!
However, the LRAS can also
shift to the left.
This happens if something
reduces our amount of land,
labor or capital:
-Natural disasters
-Wars
These changes would shift
our LRAS in, decreasing our
ability to produce into the
long run.
RECAP:
What did you learn?
• What Aggregate Supply is and what it looks
like.
• Difference between SRAS and LRAS.
• How LRAS can move to change our
country’s potential for production.