Shifting Aggregate Supply SRAS LRAS Shifts Short Run

Shifting Aggregate Supply SRAS & LRAS Shifts

Short Run Equilibrium • Output deviates only in short run when actual price level deviates from expected price level • In long run, wages & prices are not “sticky” and do not affect output (price level has no effect) – Prices/wages become flexible!

Shifts in LRAS Curve • Shifts occur when a factors of production changes: – – – Labor Capital Natural resources Technology Government Incentives • Why: Any change which alters the natural rate of output shifts the LRAS curve – When LRAS shifts so does SRAS

Shifts in the Long Run Aggregate Supply Curve (LRAS) LABOR CAPITAL Increase in Labor Force NATURAL RESOURCES TECHNOLOGY Discovery of new resources Change in old resources Change in Natural Rate of Unemployment Any Shift in Capital Stock Physical capital or Human capital New Technology More Free Trade

Changes in Government Policy which provide incentives to invest in capital stock or technology shift LRAS right PPF Graph Price Level LRAS 1 LRAS 2 Y 1 Y 2 Real GDP Why the USA had a strong Economy during 1980’s & 1990’s Recent History: The 1980’s & 1990’s Technology Breakthroughs occur in USA Economy

Shifts in SRAS Curve • Shifts occur when with a change in: – – – – Expected Price Level Input Prices Labor Capital Natural resources Technology Gov’t Incentives Shift SRAS but NOT LRAS Changes in the other 5 variables Shifts BOTH curves (LRAS & SRAS)

Shifting SRAS Event: Input prices suddenly rise

AD/AS Shift Worksheet

Expected Price Level (inflation) • Increase in expected price level: – Shifts the SRAS curve to left (less supply) • Decrease in expected price level: – shifts SRAS curve to right (more supply) Rise in Expected Inflation will result in workers demanding higher pay Costs rise => Less is Supplied

Example: Increase in Price Level 1. An increase in expected price Level causes a shift. . . Price Level SRAS 2 SRAS 1 B P 2 A ……………. P 3. . and the price level to rise. 0 . Y 2 2. . causes output to fall. . . Y AD 1 Real GDP

LRAS 1 LRAS 2 Price Level Real GDP Variables that shift AS: 1. Labor Force 2. Natural resources 3. Capital 4. Technology 5. Gov’t Incentives b a i ar v t ny ou a n rve i se cu a re PF c In ift P sh l ill w e