Economics
Shifts in Long run Aggregate Supply
Shifts in long run aggregate supply refer to changes in the potential output of an economy over time. These shifts can be caused by factors such as changes in technology, labor force growth, and capital accumulation. An increase in long run aggregate supply leads to economic growth and lower price levels, while a decrease results in the opposite effects.
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eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Shifts of the aggregate demand curve change the price level but do not affect potential output, or long-run aggregate supply. C H E C K P O I N T Why do shifts of the aggregate demand curve change the price level in the long run but not potential output? Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 10 Aggregate Supply 227 10-4 Changes in Aggregate Supply In this section, we consider factors other than changes in the expected price level that may affect aggregate supply. We begin by distinguishing between long-term trends in aggregate supply and supply shocks, which are unexpected events that affect aggregate supply, sometimes only temporarily. 10-4a What If Aggregate Supply Increases? The economy’s potential output is based on the willingness and ability of households to supply resources to firms, the level of technology and know-how, and the institu- tional underpinnings of the economic system. Any change in these factors could affect the economy’s potential output. Changes in the economy’s potential output over time were introduced in the earlier chapter that focused on U.S. productivity and growth. The supply of labor may change over time because of a change in the size, composition, or quality of the labor force or a change in preferences for labor versus leisure. For ex- ample, the U.S. labor force has more than doubled since 1948 as a result of population growth and a growing labor force participation rate, especially among women with children. At the same time, job training, education, and on-the-job experience increased the quality of labor.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Shifts of the aggregate demand curve change the price level but do not affect potential output, or long-run aggregate supply. C H E C K P O I N T Why do shifts of the aggregate demand curve change the price level in the long run but not potential output? Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 24 Aggregate Supply 559 24-4 Changes in Aggregate Supply In this section, we consider factors other than changes in the expected price level that may affect aggregate supply. We begin by distinguishing between long-term trends in aggregate supply and supply shocks, which are unexpected events that affect aggregate supply, sometimes only temporarily. 24-4a What If Aggregate Supply Increases? The economy’s potential output is based on the willingness and ability of households to supply resources to firms, the level of technology and know-how, and the institu- tional underpinnings of the economic system. Any change in these factors could affect the economy’s potential output. Changes in the economy’s potential output over time were introduced in the earlier chapter that focused on U.S. productivity and growth. The supply of labor may change over time because of a change in the size, composition, or quality of the labor force or a change in preferences for labor versus leisure. For ex- ample, the U.S. labor force has more than doubled since 1948 as a result of population growth and a growing labor force participation rate, especially among women with children. At the same time, job training, education, and on-the-job experience increased the quality of labor.
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
In other words, wages and prices that are inflexible or slow to adjust in the short run adjust to changes in the price level over the long run. Thus, over the long run, when the aggregate price level changes, wages and other input prices change proportionately so that the higher aggregate price level has no impact on aggregate supply. This is illustrated by the vertical long-run aggregate supply (LRAS) curve in Exhibit 5-14. As prices move from P 1 to P 2, the quantity of output supplied remains at Q 1 in the long run. The only change that occurs is that prices shift to a higher level (from P 1 to P 2). The position of the LRAS curve is determined by the potential output of the economy. The amount of output produced depends on the fixed amount of capital and labor and the available technology. This classical model of aggregate supply can be expressed as: where is the fixed amount of capital and is the available labor supply. The stock of capital is assumed to incorporate the existing technological base. 8 The available labor supply is also held constant, and workers are assumed to have a given set of skills. The long-run equilibrium level of output, Y 1 in Exhibit 5-14, is referred to as the full employment, or natural, level of output. At this level of output, the economy’s resources are deemed to be fully employed and (labor) unemployment is at its natural rate. This concept of a natural rate of unemployment assumes the macroeconomy is currently operating at an efficient and unconstrained level of production. Companies have enough spare capacity to avoid bottlenecks, and there is a modest, stable pool of unemployed workers (job seekers equal job vacancies) looking for and transitioning into new jobs. 3.3. Shifts in Aggregate Demand and Supply In the next two sections, the aggregate demand (AD) and aggregate supply (AS) models are used to address three critical macroeconomic questions: 1. What causes an economy to expand or contract? 2
eBook - ePubMacroeconomics
(With Study Guide CD-ROM)
- Jagdish Handa(Author)
- 2010(Publication Date)
- WSPC(Publisher)
y*) = 0. However, we cannot take it for granted that the real-world economies will meet these assumptions for each period of our study, when these periods are as short as, say, a month, a quarter, or a year. We, therefore, resorted to the analytical notion of the long run, which is defined as the stage in which these assumptions are met, so that the economy can be said to be at the full-employment (LR) level of output.Hence, the aggregate supply curve for the full-employment level of output is called the LR aggregate supply (LRAS) curve. It is applicable in the case of zero expectational errors, zero adjustment costs and lags, and equilibrium in the labor market and in production. It is strictly not applicable when these conditions are not met. However, the LR levels of output and employment can be used as a benchmark or reference state toward which the economy will tend to move. If it does not do so of its own volition or does not do so fast enough, macroeconomics (see Chapters 8 and 9 ) examines the policies that can induce such a movement.7.11.1 Changes in the actual rate of output over timeThe actual level of output alters over time because of changes in any or all of its three components since:As we have argued earlier, the full-employment level of output does change over time due to shifts in technology and in labor supply. The other two components of the actual level can also change and do change over the business cycle. In particular, they are positively related to the business cycle and tend to have positive values during a boom than during a recession. They can be changed by monetary and fiscal policies.7.12 The Rate of UnemploymentThis chapter has focused on the long-run analysis of output and employment. Changes in unemployment and its rate are the converse of those in employment, so that we now derive the implications of the long-run analysis for unemployment. Chapter 10
eBook - PDFMacroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
This chapter took the next step by showing how shifts in the aggregate demand curve cause fluctuations in both real GDP and prices—fluctuations that are widely decried as undesirable. It also sug-gested that the economy’s self-correcting mechanism works, but slowly, thereby leaving room for government stabilization policy to improve the workings of the free market. Can the government really accomplish this goal? If so, how? These are some of the important questions for Part 3. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 10 Bringing in the Supply Side: Unemployment and Inflation? 211 1. The economy’s aggregate supply curve relates the quantity of goods and services that will be supplied to the price level. It normally slopes upward to the right because the costs of labor and other inputs remain relatively fixed in the short run, meaning that higher selling prices make input costs relatively cheaper and therefore encourage greater production. 2. The position of the aggregate supply curve can be shifted by changes in money wage rates, prices of other inputs, technology, or quantities or qualities of labor and capital. 3. The equilibrium price level and the equilibrium level of real GDP are jointly determined by the intersec-tion of the economy’s aggregate supply and aggregate demand schedules. 4. Among the reasons why the oversimplified multiplier formula is wrong is the fact that it ignores the inflation that is caused by an increase in aggregate demand. Such inflation decreases the multiplier by reducing both consumer spending and net exports.
eBook - PDF- Peter J. Montiel(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
Thus full-employment GDP is given by Y P = AF ( K , L P , ) (4.2) Short-run macroeconomics is typically concerned with stabilization of employment around its full-employment level, the determination of the average price level in the economy, and the behavior of various components of the economy’s balance of payments. The long run, by contrast, is a period of time long enough that the capital stock and state of technological knowledge can change endogenously . Long-run macroeconomics is primarily concerned with what determines how the level of the economy’s productive capacity changes over time. As we saw in the preceding chapter, increases in economic capacity are what we refer to when we use the term economic growth . Notice that this means that growth does not just refer to an increase in real GDP but to an increase in productive capacity , whether that capacity is used or not. It is useful to clarify the distinction algebraically. Using the aggregate production function, we can approximate the change in (actual) output during any given period of time as the sum of contributions made by each of the three arguments in the production function, where the contribution of each is the change in that argument multiplied by its marginal product, Y = F A + MP K K + MP L L because MP A , the marginal product of A , is just F . Dividing through by Y , and noting that AF / Y = 1, Y / Y = A / A + MP K ( K / Y ) K / K + MP L ( L / Y ) L / L 5 (4.3) Recalling that for any variable X , X / X is just the rate of growth of X , this equation states that the growth of Y depends on the rates of growth of total factor productivity, of the stock of physical capital, and of labor. An equation such as this is often used by economists to decompose growth into the contributions of factor accumulation and improvements in TFP, in an exercise referred to as growth accounting .
eBook - PDF- Martha L. Olney(Author)
- 2011(Publication Date)
- Wiley(Publisher)
PART II The Long Run 69 Chapter 5 Long-Run Economic Growth Why are some nations rich and others poor? Why do standards of living sometimes rise quickly and other times slowly . . . or not at all? Economists answer these questions with models of economic growth. Economies can produce more output—become richer—when there are more inputs or when the inputs’ productivity rises. KEY TERMS AND CONCEPTS • Growth • Growth rate of the economy • Rule of 70 • Aggregate production function • Capital-labor ratio • Constant returns to scale • Scale of production • Economies of scale • Increasing returns to scale • Diseconomies of scale • Decreasing returns to scale • Growth accounting • Residual growth • Total factor productivity (TFP) • Labor productivity • Capital productivity • Capital stock • Investment • Depreciation rate • Human capital • Property rights • Intellectual property rights • Productivity growth slowdown • Productivity growth resurgence 71 72 Chapter 5 Long-Run Economic Growth KEY EQUATIONS • Real GDP per capita • Rate of change • Aggregate production function KEY GRAPH • Aggregate production function WHAT IS GROWTH? Economists use the word “growth” in two different contexts: short-run and long- run contexts. For macroeconomists, the short run is a period of a few months to a few years. Macroeconomists who focus on the short run use the term growth to refer to changes in real GDP from quarter to quarter, or year to year. Some use the phrase “growing the economy” to refer to policies or events that make real GDP increase over the short run. The long run is a period of a decade or a generation. Long-run growth refers to changes from decade to decade, or generation to generation. Changes in what? Unfortunately for students, there are two answers. Some economists and text- books use one definition of long-run growth; others use the other.
eBook - ePub- Peter Antonioni, Sean Masaki Flynn(Authors)
- 2010(Publication Date)
- For Dummies(Publisher)
for long. At price level P Low , people want to buy Y Highworth of output. But that’s more than firms can produce at full employment. The only way to produce that much output is if employees work longer than the standard working week. The only way to get them to do so is to pay them more, and the only way to give them higher wages is for firms to raise prices. So with demand exceeding supply, prices are raised until they reachP * , at which price level the quantity demanded by consumers is exactly equal to the full-employment output level, Y * .As you can see, if prices have enough time to adjust, the economy always returns to producing at output level Y * . Because we’re calling the time required for prices to adjust the long run , it makes sense to call the vertical line above Y * the long-run aggregate supply curveA shock to the system: Adjusting to a shift in aggregate demand, because it shows how much output the economy will supply after prices have had enough time to adjust to equalise the supply and demand for goods and services. (For much more about supply and demand, see Chapter 8.)The previous section shows what happens if the prices of goods and services are, on the whole, too high or too low: they eventually adjust to the equilibrium price level (P * ) , and so the economy can get back to producing at the full-employment output level (Y * ). But what causes the prices to be too high or too low in the first place? The usual cause is a shock to aggregate demand – the total amount of goods and services that people are willing to buy.First, visualise what a shock to aggregate demand looks like: Figure 6-3 shows the aggregate demand curve shifting to the left from AD o to AD 1 . A leftward shift of aggregate demand is called a negative demand shock , and it may be caused, for example, by a decline in confidence in the economy that makes people want to save more and consume less. (A rightward shift of
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