Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part II.

Copyright © 2004 South-Western

Mods Mods 17-21, 17-21,

3030Macro Analysis

Part II


THE AGGREGATE-SUPPLY CURVE

• Now, let’s look at Overall or AGGREGATE Supply…


The Basic Model of Economic Fluctuations

• The Basic Model of Aggregate Supply• The aggregate-supply curve shows the quantity of

goods and services that firms choose to produce and sell at each price level.


The Short-Run Aggregate-Supply Curve

GDP=Quantity ofOutput

PriceLevel

0

Short-runaggregate

supply

1. A decreasein the pricelevel . . .

2. . . . reduces the quantityof goods and servicessupplied in the short run.

Y

P

Y2

P2



Why the Aggregate-Supply Curve Slopes Upward in the Short Run

• In the short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied.

• A decrease in the level of prices tends to reduce the quantity of goods and services supplied.



• There are 2 reasons for why the AS curve slopes upward in the short run…



1. The Sticky-Wage Theory• Nominal wages are slow to adjust, or are “sticky” in

the short run:• A lower price level makes employment and production

less profitable.

• This induces firms to reduce the quantity of goods and services supplied.

• Wages do not adjust immediately to a fall in the price level—there is a lag, while the wages “stick”

So…there will be movement downward on the AS curve until wages are adjusted



2. The Sticky-Price Theory• Prices of some goods and services adjust sluggishly

in response to changing economic conditions: • An unexpected fall in the price level leaves some firms

with higher-than-desired prices—prices are temporarily “stuck”

• This depresses sales, which induces firms to reduce the quantity of goods and services they produce.

• Eventually, prices will be changed, to match the overall price level and movement on the curve will stop


Shifts in the Aggregate SupplyCurve

Quantity ofOutput

PriceLevel

0

AggregateSupply S1

P1

Y1 Y2

AggregateSupply S2


Why the Short-Run Aggregate-Supply Curve Might Shift

• Shifts arising from:• Labor—changes in labor prices (wages)• Capital—changes in equip/facilities• Natural Resources—changes in commodity prices• Technology—changes in tech


Why the Aggregate-Supply CurveMight Shift

• Aggregate Supply Shifts worksheet


• Model used to analyze economic fluctuations

The AD-AS ModelThe AD-AS Model


Short-Run Macroeconomic Short-Run Macroeconomic EquilibriumEquilibrium

• Short-Run Macroeconomic Equilibrium

• Price Level

• Aggregate Output

• Shortage/Surplus


Shifts of Aggregate Demand: Shifts of Aggregate Demand: Short-Run EffectsShort-Run Effects

•Demand Shock

•Negative Demand Shock

•Positive Demand Shock


Shifts of the SRAS CurveShifts of the SRAS Curve

•Supply Shock

•Negative Supply Shock

•Stagflation

•Positive Supply Shock


Shifts of the SRAS & AD Curves

• Shifts Practice Worksheet

Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part II.

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Transcript of Copyright © 2004 South-Western Mods 17-21, 30 Macro Analysis Part II.