MAcro CHAPTER 3.3:

CHAPTER SUMMARY

In 3.1, we saw that when we add up all the demand for all different goods at different price levels, we get the aggregate demand (AD) curve. Similarly, when we add up all the supply for all different goods and different, price levels, we get the aggregate supply (AS) curve. This sloped curve is more specifically known as the short-run aggregate supply (SRAS) curve, because it shows what suppliers are willing to produce in the short-run, at the current price levels. We can see that, as price levels rise, suppliers are willing to supply more and more goods.

The SRAS curve shifts for reasons that probably sound pretty familiar, because they are closely related to determinants of supply from Micro:

• Resource prices: As prices of inputs (labor, materials, etc.) get cheaper, the economy will be willing to supply a higher quantity of goods at the same price level.

• Government action: Taxes, subsidies, and regulation (rules) can shift the SRAS curve depending on how they impact producers.

• Productivity: When inputs become more productive - usually due to innovation - the SRAS curve shifts to the right because costs of production falls.

Shifts in AS or SRAS look exactly the same as changes in the supply curve.

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