Long Run v. Short Run
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Long Run
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Short Run
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Period of time where input prices are flexible and adjust to prices
in the change level
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Period of time where input prices are sticky and don’t adjust to
changes in the price level
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In the long run, the level of Real GDP supplied is independent of the
price level
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In the short run, the level of Real GDP supplied is directly related
to the price level
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Long Run Aggregate Supply (LRAs)
-Marks level of full employment on economy (analogous to PPC)
-Because input prices are completely flexible in the long run, changes in price level don't change a firm's real profits therefore it doesn't change a firm's level of output. This means the LRAS is vertical at the economy's level of full employment.
Changes in SRAS
Increase in SRAS is seen as shift rightward
Decreases in SRAS is seen as shift leftward
*SRAS shifts is per unit cost of production* (per unit cost of prod.= total input costs/ total input)
Determinants of SRAS
(all affect unit prod. cost)
1. Input Prices- Domestic Resource Prices (wages = 75%, capital, raw materials); Foreign Resource Prices; Market Power; Increase in Resource Prices= SRAS left while a decrease sends SRAS right
2. Productivity- total output/total input; More productivity = lower unit prod and send SRAS shifting to the right. Lower productivity = higher unit prod. cost sending SRAs left
3. Subsidies- money from governments to businesses to reduce unit prod. cost and sending SRAS to the right
Full Employment
Exists where AD intersects SRAS and LRAS at the same point
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