Module 18 Aggregate Supply: Introduction and Determinants

Module 18 Aggregate Supply: Introduction and Determinants

1. Aggregate Supply is the relationship between aggregate price level and the quantity of aggregate output supplied

   • the economy-wide decline in demand was due to unemployment, decline in output, and decrease in prices of goods and services

2. The short-run Aggregate Supply Curve is the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

   • A rise in aggregate price level means that there is a rise in the quantity of aggregate output supplied
     • A fall in aggregate price level means that there is a fall in the quantity of aggregate output suppied

3. Profit per unit of output = Price per unit of output - Production cost per unit of output

   • wages paid to workers is an inflexible production cost
     • nominal wage is determined by a contract
       • Ex: companies don't reduce wages during bad economic times and do not raise wages during good economic times unless they are at risk at losing workers

4. Sticky wages: are nominal wages that the are slow to fall even in the high unemployment and slow to rise even in the face of labor shortages

5. roducers can choose the prices they charge

6. CHANGES IN COMMODITY PRICES: an increase in the price of commodity pil raised production costs across the economy and reduced the quantity of aggregate putput supplied at any given price evelshifting the short run aggregate supply curve to the left

7. CHANGES IN NOMINAL WAGES: the wages of many workers are fixed because they are set by contracts or formal agreements made in the past

8. CHANGES IN PRODUCTIVITY: an increase in productivity means that a worker can produce more units of output with the same quantity of inputs.

9. Figure 18.1 and 18.2

   • 18.1: the short-run aggregate supply curve is upward sloping because a higher aggregate price level leads to a higher profit per unit. The Great Depression (1929-1933)when deflation occurred the aggregate price level fell from 10.6 to 7.9.

10. Long-run Aggregate Supply Curve: wages and resource prices will increase as price levels increase

    • Figure 18.3 and 18.4
      • 18.3: the long run aggregate supply curve is vertival because it has no effect on the quantity of aggregate output
      • 18.4: the actual and potential output (estimates by the congressional budget office)

11. From Short-run to long-run:

    • Figure 18.5: low employment will cause nominal wages to rise