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The PETRONAS company discovered a new gas field., SRAS - Short Run…
The PETRONAS company discovered a new gas field.
LRAS - Long Run Aggregate Supply
In the long-run equilibrium,
PE = P, Y = YN and unemployment is at its natural rate.
In the long run, the aggregate-supply curve is vertical because the price level does not affect long run determinants of real GDP.
In the short run, the aggregate-supply curve is upward sloping.
In the long run, the production of output depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services.
The price level does not affect these variables in the long run.
The long-run aggregate supply represents the classical dichotomy and money neutrality.
The long-run aggregate-supply curve is vertical at the natural rate of output, which is the production of output that an economy achieves in the long run when unemployment is at its normal rate.
This level of production is also referred to as potential output or full-employment output.
The natural rate of output is the level of output towards which the economy gravitates in the long run.
Process
When the price level equals the expected price level, the output is equal to its long-run value, the natural rate of output.
PE = P &AS curve is vertical
In the long run, the imperfections in the sticky-price theory are temporary. Over time, sticky prices become flexible.
The discovery of a new gas field will increase stock in the short run and cause the Equilibrium Price to decrease from P0 to P1 and the quantity of output will increase from the left to the right which is from Y0 to Y1.
Notes
Consider an adverse shift in aggregate supply:
The increase in natural resources cause the aggregate supply shifts the curve to the left.
Output increases beyond the natural rate of employment.
Unemployment decreases.
The price level decreases.
SRAS - Short Run Aggregate Supply
The Sticky-Price Theory
Many prices are sticky in the short run.
Due to menu costs, the costs of adjusting prices.
Referring to the time that required PETRONAS to change the price in the market
the company will set sticky prices in advance based on the equilibrium price.
In the short run, the PETRONAS with menu costs will wait to raise prices. With relatively low prices, the market will increase demand for their products.
In this situation the company can increase output and employment.
Hence, higher P is associated with higher Y, so the SRAS curve slopes upward.
If the PETRONAS company discovers a new gas field, the Aggregate Supply Curve will shift from left to right, AS0 to AS1 due to the changes in natural resources .
The discovery of a new gas field will increase stock in the short run and cause the Equilibrium Price to decrease from P0 to P1 and the quantity of output will increase from the left to the right which is from Y0 to Y1.
SRAS curve