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Macroeconomics in Modules Economics in Modules: Krugman/Wells Third Edition

This document discusses aggregate supply curves. It explains that the short-run aggregate supply curve is upward sloping because wages are sticky in the short-run. Factors like commodity prices, wages, and productivity can shift the short-run curve. The long-run aggregate supply curve is vertical at potential output as all prices are flexible. The document aims to explain aggregate supply curves and their shifts in both the short and long-run.

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74 views14 pages

Macroeconomics in Modules Economics in Modules: Krugman/Wells Third Edition

This document discusses aggregate supply curves. It explains that the short-run aggregate supply curve is upward sloping because wages are sticky in the short-run. Factors like commodity prices, wages, and productivity can shift the short-run curve. The long-run aggregate supply curve is vertical at potential output as all prices are flexible. The document aims to explain aggregate supply curves and their shifts in both the short and long-run.

Uploaded by

shutupfag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Macroeconomics in Modules

and
Economics in Modules
Third Edition
Krugman/Wells

MODULE 28 (64)
Aggregate Supply
What You Will Learn

1 How the aggregate supply curve illustrates the


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

2 What factors can shift the aggregate supply curve


Why the aggregate supply curve in the short run is
3 different from the aggregate supply curve in the long
run

2
The Aggregate Supply Curve

• The aggregate supply curve shows the relationship


between the aggregate price level and the quantity of
aggregate output in the economy.

3
The Short-Run
Aggregate Supply Curve
• The short-run aggregate supply curve is upward-
sloping because nominal wages are sticky in the short run:
– a higher aggregate price level leads to higher
profits and increased aggregate output in the short
run.

• The nominal wage is the dollar amount of the wage paid.

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

4
The Short-Run
Aggregate Supply Curve
Aggregate price
level (GDP deflator,
2005 = 100) Short-run aggregate
supply curve, SRAS

10.6
1929

7.9 A movement down


1933 the SRAS curve leads
to deflation and lower
aggregate output.

0 $716 977 Real GDP (billions of


2005 dollars) 5
Shifts of the Short-Run
Aggregate Supply Curve
(a) Leftward Shift (b) Rightward Shift

Aggregate Aggregate
price level price level

SRAS 2 SRAS 1
SRAS 1 SRAS 2

Decrease in short-run Increase in short-run


aggregate supply aggregate supply

Real GDP Real GDP


6
Shifts of the Short-Run
Aggregate Supply Curve
• Changes in commodity prices, nominal wages,
or productivity lead to changes in producers’
profits and shift the short-run aggregate supply
curve.

7
Factors that Shift Short-Run Aggregate
Supply

8
Long-Run Aggregate Supply Curve

• The long-run aggregate supply curve shows the


relationship between the aggregate price level and the
quantity of aggregate output supplied that would exist if
all prices, including nominal wages, were fully flexible.

9
Long-Run Aggregate Supply Curve
Aggregate price Long-run aggregate
level (GDP deflator, supply curve, LRAS
2005 = 100)
15.0
…leaves the quantity
A fall in the of aggregate output
aggregate supplied unchanged
price level in the long run.

7.5

0 Potential $800 Real GDP (billions of


output, YP 2005 dollars) 10
Actual and Potential Output
from 1989 to 2009

11
From the Short Run to the Long Run
(a) Leftward Shift of the Short-Run (b) Rightward Shift of the Short-Run
Aggregate Supply Curve Aggregate Supply Curve

Aggregate Aggregate
price level price level

LRAS LRAS SRAS1


SRAS2
SRAS2
SRAS1

A1 A1 A fall in nominal
P1 P1 wages shifts SRAS
rightward.
A rise in nominal
wages shifts SRAS
leftward.

YP Y1 Y1 YP
Real GDP Real GDP

12
Economics in Action
Prices and Output During the Great Depression

13
Summary
1. The aggregate supply curve shows the relationship
between the aggregate price level and the quantity of
aggregate output supplied.
2. The short-run aggregate supply curve is upward
sloping because nominal wages are sticky in the short
run.
3. Changes in commodity prices, nominal wages, and
productivity lead to changes in producers’ profits and
shift the short-run aggregate supply curve.
4. In the long run, all prices are flexible and the economy
produces at its potential output, and the long-run
aggregate supply curve is vertical at potential output.
14

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