Aggregate supply is the total output of goods and services, which all firms in the economy are willing and able to supply at different price levels over a period of time. The short run AS curve slopes upwards. In the short run, firms respond to price increases by supplying more goods but, as we shall see, in the long run supply may not always respond to an increase in price levels. However, think for a moment what might cause the short-run aggregate supply curve to shift.
Try drawing the diagrams for an increase in aggregate supply and a decrease in aggregate supply and then list factors that might cause each shift. Once you have done that follow the link below. Remember that a change in the price level will not cause a shift of the SRAS. It will cause a movement along the curve.
There are, essentially, three different views:. The Classical view of real output was that it was fixed at a particular level. At this level, all the factors of production in the economy would be fully employed. Say at output The Keynesian AS curve assumes that prices and wages are fixed until full employment is reached.
Beyond full employment, any changes in AD will bring about higher price levels. The adapted Keynesian AS curve is more realistic, and highlights the trade-offs that can occur between the price level and unemployment.
The short run is assumed to begin immediately after an increase in the price level for example, as a result of an increase in AD , and ends when input prices costs of production have increased. This allows economists to be more flexible in their analysis of a modern economy. This can be seen in the following example:. Other shifts in the SRAS curve are referred to a supply-side shocks, such as unexpected increases in oil prices or following crop failures, as illustrated below:.
The long run aggregate supply curve LRAS is shown as a vertical curve, at full employment. This cookie is used to distinguish the users. The cookie is used to give a unique number to visitors, and collects data on user behaviour like what page have been visited.
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This information us used to select advertisements served by the platform and assess the performance of the advertisement and attribute payment for those advertisements. The AS curve model plots the quantity of goods and services supplied in an economy at a certain price level. Alongside with aggregate demand AD analysis, AS can be used to investigate the relationship between price level P and real income Y. Not surprisingly, the absence of unambiguous empirical data about AS is the main reason for controversy in supply-side economics.
The vertical LRAS model was created by the classical economists; however, they were focused on explaining the long run only and not analysing short run economic fluctuations. Clearly, this level of output can occur at various price levels P , as illustrated below. Classical economists argue that in the long run " amount of output produced depends on the fixed amounts of capital and [labour] and on the available technology.
The function depends on technological process. Another important implication is that the production has a physical limit set by F K,L. Given that all prices are flexible, it follows that the prices will adjust to any changes in demand. Although Keynes famously stated: " in the long run we are all dead ", Mankiw states that most economists agree with the classical long run view.
However, Keynesians argue that immediately adjusting totally flexible prices is too strong an assumption for the short-run analysis. The Keynesians assume that the prices take time to adjust in changes in demand in the short run; "prices are sticky ".
I will use the assumption that all prices are fixed in the short run, which is consistent with extreme Keynesian thought. Therefore, the SRAS curve shown below is horizontal. The antithetical nature of these two models brings along questions: what happens when we move from the short-run to the long-run? The extreme Keynesian explanation is shown below. The policy implication is that fiscal policy is effective and no complete crowding-out of private investment occurs.
Hence, expansionary fiscal and monetary policies increase Y but not P in the short run. In Keynesian analysis, wages are important and I will briefly discuss the wage-price relation relevant to this debate.
This can be clarified graphically:. Thus, wages are procyclical. However, this observation is based on L-shaped AS curve, which is a rigid assumption. Hence I will discuss alternatives to extreme Keynesian model. The extreme Keynesian view is based on strong assumptions and therefore its correlation with reality is reduced.
Many academics have challenged the extreme Keynesian views on the AS curves, because there is controversial empirical evidence. The extreme model was developed further by the moderate Keynesians. Moderate Keynesians developed an upward-sloping middle section to the model.
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