Macroeconomics

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Macroeconomics

• Aggregate Supply
• IB Course CompanionText ch 17

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Quick Review

• The following topics will be discussed during
  this presentation
• Factors of Production
• Labor, land, capital, entrepreneurship
• Short Run vs Long Run
• Production Possibilities Curve
• Potential vs Actual economic growth

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Aggregate Supply Defined

• Aggregate Supply the total amount of goods and
  services that all industries in the economy will
  produce at every given price level.

• The sum of the supply curves for all the
  industries in the economy.
• Two varieties Short run and Long run
• Increasing Aggregate Supply is necessary for
  economic growth.
• Dependent on the factors of production

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SRAS

• Short Run Aggregate Supply
• Looks very much like microeconomic supply curve.
• In short run, as price level rises aggregate
  supply increases.
• Short run period of time when prices of the
  factors of production do not change. Most
  importantly, the price of labor, the wage rate,
  is fixed.

Short Run Aggregate Supply
Avg Price Level
Real output Y
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Shifts in SRAS

• Shifts in the SRAS are caused by things other
  than changes in price level.
• These are sometimes known as supply side shocks

• Wage rates - increasing wages mean increasing
  costs of production.
• Costs of raw materials - some materials are used
  in many products (think oil)
• Price of imports - if raw materials or capital
  is imported, then rising import prices will
  affect the costs of production.

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Short Run Macroeconomic Equilibrium

• In the short run, aggregate supply and aggregate
  demand interact to set both average price level
  and real output.

SRAS
Avg Price Level
PL
AD
Y
Real Output (Y)
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Long Run Aggregate Supply Keynesian

• In Keynes view, national economies are normally
  within their maximum production. At low levels
  of production, aggregate supply was completely
  elastic.
• When a nation approached its maximum production
  limits, aggregate supply became completely
  inelastic.

Avg Price Level
Yf
Real Output (Y)
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Long Range Aggregate Supply Neoclassical

• Neoclassical economists see long range aggregate
  supply as perfectly inelastic whenever the
  economy is at the full employment level of
  output.
• An outward shift in LRAS means that its
  productive capactiy has increased.

LRAS1
LRAS2
Avg Price Level
Real Output (Y)
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Supply Side Policies

• The overarching goal of supply-side policies is
  to increase the output of the economy by
  increasing the quantity of the factors of
  production and/or improving the quality of the
  factors of production. We can divide these
  policies into two categories Market oriented and
  interventionist.

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Market Oriented Supply Side Policies
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Interventionist Supply Side Policies
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Conclusion

• Governments use both market and interventionist
  policies to affect aggregate supply.
• Increasing aggregate supply is necessary for
  economic growth.
• Changes in aggregate supply are based in changes
  in the factors of production.