As prices increase in the short-run output increases this is because wages
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\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\) Introducing Aggregate SupplyAggregate supply is the total supply of goods and services that firms in a national economy plan to sell during a specific time period. Learning objectives
Aggregate SupplyIn economics, aggregate supply is the total supply of goods and services that firms in a national economy plan to sell during a specific time period. It is the total amount of goods and services that the firms are willing to sell at a given price level in the economy. Aggregate supply is the relationship between the price level and the production of the economy. Aggregate Supply: Aggregate supply is the total quantity of goods and services supplied at a given price. Its intersection with aggregate demand determines the equilibrium quantity supplied and price. Short-run Aggregate SupplyIn the short-run, the aggregate supply is graphed as an upward sloping curve. The equation used to determine the short-run aggregate supply is: \(\mathrm{Y = Y^* + α(P-P_e)}\). In the equation, Y is the production of the economy, Y* is the natural level of production of the economy, the coefficient α is always greater than 0, P is the price level, and Pe is the expected price level from consumers. The short-run aggregate supply curve is upward sloping because the quantity supplied increases when the price rises. In the short-run, firms have one fixed factor of production (usually capital ). When the curve shifts outward the output and real GDP increase at a given price. As a result, there is a positive correlation between the price level and output, which is shown on the short-run aggregate supply curve. Long-run Aggregate SupplyIn the long-run, the aggregate supply is graphed vertically on the supply curve. The equation used to determine the long-run aggregate supply is: \(\mathrm{Y = Y^*}\). In the equation, Y is the production of the economy and Y* is the natural level of production of the economy. The long-run aggregate supply curve is vertical which reflects economists’ beliefs that changes in the aggregate demand only temporarily change the economy’s total output. In the long-run, only capital, labor, and technology affect aggregate supply because everything in the economy is assumed to be used optimally. The long-run aggregate supply curve is static because it is the slowest aggregate supply curve. The Slope of the Short-Run Aggregate Supply CurveIn the short-run, the aggregate supply curve is upward sloping. Learning objectives
Aggregate SupplyAggregate supply is the total supply of goods and services that firms in a national economy plan to sell during a specific period of time. It is the total amount of goods and services that firms are willing to sell at a given price level. Short-run Aggregate Supply CurveIn the short-run, the aggregate supply curve is upward sloping. There are two main reasons why the quantity supplied increases as the price rises:
Short-run Aggregate Supply EquationThe equation used to calculate the short-run aggregate supply is: \(\mathrm{Y = Y^* + α(P-P_e)}\). In the equation, Y is the production of the economy, Y* is the natural level of production, coefficient is always positive, P is the price level, and Pe is the expected price level. In the short-run, firms possess fixed factors of production, including prices, wages, and capital. It is possible for the short-run supply curve to shift outward as a result of an increase in output and real GDP at a given price. As a result, the short-run aggregate supply curve shows the correlation between the price level and output. Aggregate Supply Curve: This graph shows the aggregate supply curve. In the short-run the aggregate supply curve is upward sloping. When the curve shifts outward, it is due to an increase in output and real GDP. The Slope of the Long-Run Aggregate Supply CurveThe long-run aggregate supply curve is perfectly vertical; changes in aggregate demand only cause a temporary change in total output. Learning objectives
Aggregate SupplyIn economics, aggregate supply is defined as the total supply of goods and services that firms in a national economy are willing to sell at a given price level. Long-run in EconomicsThe long-run is the conceptual time period in which there are no fixed factors of production; all factors can be changed. In the long-run, firms change supply levels in response to expected economic profits or losses. Long-run Aggregate Supply CurveIn the long-run, only capital, labor, and technology affect the aggregate supply curve because at this point everything in the economy is assumed to be used optimally. The long-run aggregate supply curve is static because it shifts the slowest of the three ranges of the aggregate supply curve. The long-run aggregate supply curve is perfectly vertical, which reflects economists’ belief that the changes in aggregate demand only cause a temporary change in an economy’s total output. In the long-run, there is exactly one quantity that will be supplied. Aggregate Supply: This graph shows the aggregate supply curve. In the long-run the aggregate supply curve is perfectly vertical, reflecting economists’ belief that changes in aggregate demand only cause a temporary change in an economy’s total output. The long-run aggregate supply curve can be shifted, when the factors of production change in quantity. For example, if there is an increase in the number of available workers or labor hours in the long run, the aggregate supply curve will shift outward (it is assumed the labor market is always in equilibrium and everyone in the workforce is employed). Similarly, changes in technology can shift the curve by changing the potential output from the same amount of inputs in the long-term. For the short-run aggregate supply, the quantity supplied increases as the price rises. The AS curve is drawn given some nominal variable, such as the nominal wage rate. In the short run, the nominal wage rate is taken as fixed. Therefore, rising P implies higher profits that justify expansion of output. However, in the long run, the nominal wage rate varies with economic conditions (high unemployment leads to falling nominal wages — and vice-versa). The equation used to calculate the long-run aggregate supply is: \(\mathrm{Y = Y^*}\). In the equation, Y is the level of economic production and Y* is the natural level of production. Moving from Short-Run to Long-RunIn the short-run, the price level of the economy is sticky or fixed; in the long-run, the price level for the economy is completely flexible. Learning objectives
In economics, the short-run is the period when general price level, contractual wages, and expectations do not fully adjust. In contrast, the long-run is the period when the previously mentioned variables adjust fully to the state of the economy. Aggregate SupplyAggregate supply is the total amount of goods and services that firms are willing to sell at a given price level. When capital increases, the aggregate supply curve will shift to the right, prices will drop, and the quantity of the good or service will increase. Short-run Aggregate SupplyDuring the short-run, firms possess one fixed factor of production (usually capital). It is possible for the curve to shift outward in the short-run, which results in increased output and real GDP at a given price. In the short-run, there is a positive relationship between the price level and the output. The short-run aggregate supply curve is an upward slope. The short-run is when all production occurs in real time. Aggregate Supply: This graph shows the relationship between aggregate supply and aggregate demand in the short-run. The curve is upward sloping and shows a positive correlation between the price level and output. Long-run Aggregate SupplyIn the long-run only capital, labor, and technology impact the aggregate supply curve because at this point everything in the economy is assumed to be used optimally. The long-run supply curve is static and shifts the slowest of all three ranges of the supply curve. The long-run curve is perfectly vertical, which reflects economists’ belief that changes in aggregate demand only temporarily change an economy’s total output. The long-run is a planning and implementation stage. Moving from Short-run to Long-runIn the short-run, the price level of the economy is sticky or fixed depending on changes in aggregate supply. Also, capital is not fully mobile between sectors. In the long-run, the price level for the economy is completely flexible in regards to shifts in aggregate supply. There is also full mobility of labor and capital between sectors of the economy. The aggregate supply moves from short-run to long-run when enough time passes such that no factors are fixed. That state of equilibrium is then compared to the new short-run and long-run equilibrium state if there is a change that disturbs equilibrium. Reasons for and Consequences of Shifts in the Short-Run Aggregate Supply CurveThe short-run aggregate supply shifts in relation to changes in price level and production. Learning objectives
Aggregate SupplyThe aggregate supply is the relation between the price level and production of an economy. It is the total supply of goods and services that firms in a national economy plan on selling during a specific time period at a given price level. Short-run Aggregate SupplyIn the short-run, the aggregate supply curve is upward sloping because some nominal input prices are fixed and as the output rises, more production processes experience bottlenecks. At low levels of demand, production can be increased without diminishing returns and the average price level does not rise. However, when the demand is high, few production processes have unemployed fixed inputs. Any increase in demand and production increases the prices. In the short-run, the general price level, contractual wage rates, and expectations many not fully adjust to the state of the economy. Shifts in the Short-run Aggregate SupplyThe short-run aggregate supply shifts in relation to changes in price level and production. The equation used to determine the short-run aggregate supply is: \(\mathrm{Y = Y^*}\). Y is the production of the economy, Y* is the natural level of production, coefficient α is always positive, P is the price level, and Pe is the expected price level. In the short-run, examples of events that shift the aggregate supply curve to the right include a decrease in wages, an increase in physical capital stock, or advancement of technology. The short-run curve shifts to the right the price level decreases and the GDP increases. When the curve shifts to the left, the price level increases and the GDP decreases. Any event that results in a change of production costs shifts the short-run supply curve outwards or inwards if the production costs are decreased or increased. Factors that impact and shift the short-run curve are taxes and subsides, price of labor (wages), and the price of raw materials. Changes in the quantity and quality of labor and capital also influence the short-run aggregate supply curve. Short-run Aggregate Supply: This graph shows the Aggregate Suppy-Aggregate Demand model. In regards to aggregate supply, increases or decreases in the price level and output cause the aggregate supply curve to shift in the short-run. Key Points
Key Terms
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What happens to wages during a short run?The short run in macroeconomic analysis is a period in which wages and some other prices do not respond to changes in economic conditions. In certain markets, as economic conditions change, prices (including wages) may not adjust quickly enough to maintain equilibrium in these markets.
What happens to output when wages increase?If the selling prices of the firm's products rise while its wages and other factor costs are fixed, production becomes more profitable, and firms will presumably increase output.
What happens to prices and output in the short run?A key principle guiding the concept of the short run and the long run is that in the short run, firms face both variable and fixed costs, which means that output, wages, and prices do not have full freedom to reach a new equilibrium. Equilibrium refers to a point in which opposing forces are balanced.
What increases output in the short run?To increase output in the short run, a firm must increase the amount used of a variable input. Three relationships are crucial in this period. (Assuming labor is the only variable input in the following discussion.) Total Product (TP or Q) is the total amount of output produced.
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