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Determinants of aggregate supply

Aggregate Supply

❶L represents the quantity and ability of labor input available to the production process.

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Depending on the state of the economy, any attempt to change the output of the economy will move us along a given AS curve. There are factors that influence aggregate supply, illustratable by shifting the AS curve—these factors are referred to as determinants of AS. When these other factors change, they cause a shift in the entire AS curve and are sometimes called aggregate supply shifters.

The graph below illustrates what a change in a determinant of aggregate supply will do to the position of the aggregate supply curve. As we consider each of the determinants remember that those factors that cause an increase in AS will shift the curve outward and to the right and those factors that cause a decrease in AS will shift the curve upward and to the left.

Anything that causes input prices to rise will decrease AS and shift the AS curve to the left. Anything that causes input prices to fall will increase AS and shift the AS curve to the right. For instance, if a particular input into the production process is readily available from domestic suppliers, it will generally be cheaper, holding all else constant cet. If for no other reason, transportation costs of delivering a domestic resource to a domestic producer will be less than delivering the identical resource from a foreign supplier.

That does not even take into account the problems of getting a foreign resource such as duties and tariffs, political or social instability abroad, or other international disruptions. Another factor that can influence input prices would be the market power of the suppliers of the resource. The more competition in the supply of a resource, the cheaper that resource will be, cet. If the resource is supplied by a monopolist or a cartel think OPEC oil , the price of that resource will be higher than if the resource is supplied by a more competitive industry think corn-produced ethanol.

Independent of its price, anything that makes resources more productive will increase AS and shift the AS curve to the right; anything that makes resources less productive will decrease AS and shift the AS curve to the left.

If workers become more productive because of investments in physical or human capital, the economy will be able to produce more and the AS curve will shift to the right. If workers become less productive because of outmoded equipment, insufficient training, or excessive union interference in their workplace, the economy will be less productive, and the AS curve will shift to the left.

In brief, business taxes increase the cost of production and shift the AS curve to the left; subsidies decrease the cost of production and shift the AS curve to the right. Government regulations also influence the costs of production. What does the equilibrium between AD and AS determine? Equilibrium is illustrated below as the intersection between AD and AS. Notice that in the intermediate range, there is a tradeoff between two of the key economic variables that concern US citizens: Typically, we would like both inflation and unemployment to be low.

In the intermediate range, however, if we increase AD, inflation will go up as unemployment falls notice that if real GDP is going up, unemployment is going down: On the other hand, if we decrease AD, inflation will fall but unemployment will rise.

There is no way to simultaneously decrease inflation and decrease unemployment using demand side shifts. Do you think that decreases in AD have exactly the opposite effects as the increases?

Why do you think that prices would go up very easily but fall only slowly? Part of the answer has to do with the fact that it actually costs businesses money to change their prices think of printing new catalogs, printing new menus, recoding prices in a computer and on scanners, or sending a worker out to change the prices on a marquee.

It is worth it to the business to incur this expense when the price is going up, but when the price is going down they are hesitant to take on the expense of changing prices! During the s, a variety of factors shifted the AS curve to the left. The high inflation that was combined with a stagnant economy low levels of output and high unemployment gave rise to the term Stagflation. When Ronald Reagan was elected President in , the inflation rate was Reagan employed supply side policies that were designed to shift the AS curve to the right and reduce both inflation and unemployment simultaneously.

Only by supply side policies can you decrease both inflation and unemployment at the same time. By the time that Reagan left office eight years later, the inflation rate in the economy was 4. When the AD curve intersects the AS curve in the Keynesian Range or in the Intermediate Range such that output is below Qf, there exists what is called a recessionary gap.

The gap represents the amount of government spending that would be necessary to shift the AD to the right enough to bring output to Qf. In the Keynesian Model, the magnitude of the shift in AD will depend on the size of the multiplier. For example, if the multiplier is 2. So if the AD needs to be shifted to the right by million dollars to get to Qf and the multiplier is 2. Conversely, if the AD needs to be shifted to the left to get to Qf, there is an inflationary gap and the same multiplier principles would apply.

The changes in government spending that would close an inflationary or recessionary gap are applications of fiscal policy, which is the topic of our next lesson. Course Introduction Section Introduction to Macroeconomics Introduction to Macroeconomics Section Lesson 04 Section Economic Growth in the U. Lesson 07 Section Aggregate Supply Aggregate Supply Section Equilibrium Equilibrium Section Government Spending or Taxes?

Lesson 10 Section Why are there so many interest rates? Lesson 11 Section Summary Summary Lesson 12 Section Trade Importing and Exporting Services Section We can see this change in figure 1 to the left. As prices fall, purchasing power increase reflecting an increase in the ability to spend i. The net result in an increase in output and spending and a lower price level. In figure 2 to the left, we have a demand-side shock perhaps the result of an increase in government spending.

This shock shifts the AD relation outward. Initially there is an excess demand for goods A to B evidenced by a depletion of inventories. Given that potential output has not changed, in time this excess demand will cause the price level to increase. Clicking the pound sign " " will generate a list of every term beginning with a number. Let's drop in for a brief respite -- and lunch. Manny is bubbling profusely about the vitality of his business. Last month he turned a profit.

Yes, that much cherished profit, the goal of business firms, be they large or small. Upon closer inspection Manny's profit calculation might be suffering from an oversight or two. It seems as though Manny neglected to pay himself a wage.

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Determinants of Aggregate Supply. Changes in labor force: Anything that causes the amount of workers to increase in an economy will cause aggregate supply to increase or shift to the right. If the labor force decreases, the overall supply of .

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Aggregate supply determinants are held constant when the aggregate supply curves are constructed. A change in any of these determinants causes a shift of either the short-run aggregate supply curve, the long-run aggregate supply curve, or both. Learn aggregate supply determinants with free interactive flashcards. Choose from different sets of aggregate supply determinants flashcards on Quizlet.

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The best videos and questions to learn about Determinants of aggregate supply. Get smarter on Socratic. The ability to produce is summarized by the long run Aggregate Supply (AS) function based on the level of technology and availability of factor inputs. The ability to spend is summarized by the Aggregate Demand (AD) relationship which represents combinations of income and interest rates such that product markets and financial markets are in .