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?)
- Also denoted by AS or SRAS (short-run aggregate supply)
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
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