Lecture 13
AGGREGATE SUPPLY

1. Slope of the SS curve

• Relationship between the price level and the quantity of real GDP supplied, keeping all else constant

• Profit per unit = Price - Cost per unit (or Average cost)

• Costs of production are "fixed" in the short run

• Higher price level
  • Implies greater profit per unit ...
    ... leading firms to produce more output

  • Ergo! Positively-sloped supply curve!

• SS curve relatively flat at low GDP; becomes steep around potential GDP (Why?)

2. Shifts of the SS curve

• An increase in aggregate supply corresponds to a shift of the SS curve to the right

• The aggregate supply will increase if:
  • Wage rates fall

  • Prices of other inputs (e.g. oil) decrease

  • Technology improves