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23.2 : Supply Side of Economy - Coggle Diagram
23.2 : Supply Side of Economy
Aggregate Supply Curve
Aggregate Supply Curve
AS CURVE = relates P to quantity of output that firms would like to produce and sell under two assumptions: state of technology (productivity) & P of all factors of production is constant
AS = total output of goods & services that firms would like to produce and sell
Positive Slope of AS Curve
↑Y → ↑U → ↑P firms willing to accept
Firms will only produce and sell more output
IF
they can charge a higher price sufficient to cover higher unit costs; don't lose money like that
Increasing Slope of AS Curve
SRAS is flat at low levels of Y
excess capacity in firms
Y can be increased with small increase in cost
SRAS is steep at high levels of Y
once output is pushed past normal capacity Y*
no excess capacity in factories; overtime costs
Y can be increased only with large increases in costs
Keynesian range = horizontal portion of an AS curve (low level)
Shifts in AS Curve
Shifts in AS Curve
anything that leads to change in state of technology (productivity) or factor prices will cause
shift
in AS curve; SUCH CHANGES ARE AGGREGATE SUPPLY SHOCKS
Changes in Input Prices
Leads to firms’ profits at their current levels of output being reduced;
Firms respond to this reduction by two things:
1) maintaining their current level of output, in which case they require an increase in the price level
2) reducing their level of output if the price level does not change
↑ factor prices
causes
AS curve shifting upward and left
=
decrease in aggregate supply
BECAUSE firms will not produce and sell as much unless prices rise
↓factor prices
causes
AS curve to shift down and right
=
increase in aggregate supply
Changes in Technology (Productivity)
Improvement of technology = change of production leading to reducing unit costs for given level of output
↑ technology = AS curve SHIFTING DOWNWARD AND RIGHT = ↑ in aggregate supply
Deterioration of technology
(rare) =
any change in production that raises unit costs for any given level of output
↓ technology
= ↑ unit costs =
AS curve to shift upward and left = ↓ in aggregate supply