AP Economics

Mr. Bernstein

Module 18: Aggregate Supply: Introduction and

Determinants

March 10, 2015

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AP EconomicsMr. Bernstein

Aggregate Supply: Intro and Determinants• Objectives - Understand each of the following:• How the aggregate supply curve illustrates the

relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

• What factors can shift the aggregate supply curve• Why the aggregate supply curve is different in the short

run from in the long run

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AP EconomicsMr. Bernstein

Aggregate Supply• The relationship between aggregate price level

demand and the aggregate quantity of output supplied

• In the short run, SRAS is upward sloping

• In the long run, LRAS is vertical at potential GDP

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AP EconomicsMr. Bernstein

The Short-Run Aggregate Supply Curve• If the price of a unit of output is rising faster than

production costs, supply will rise• Why? Some input

prices are sticky,particularly wages,so as prices rise profits go up in the short run

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AP EconomicsMr. Bernstein

AS Curve Shifters• D Commodity Prices• D Nominal Wages• D Productivity

(Increase in AS isa shift “right” anddecrease in AS is a shift “left”)

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AP EconomicsMr. Bernstein

The Long-Run Aggregate Supply Curve• What if wages were flexible and followed prices?• Prices would rise, so would wages, and supply

would not move• In Long Run, wages

are flexible, so LRAS is vertical

• At Potential GDP YP

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AP EconomicsMr. Bernstein

From Short-Run to Long-Run Supply Curve• AD/AS model predicts SRAS will shift until it

intersects with LRASat YP

• Example: labor