Chapter 23, Problem 2LO

To determine

Illustrate and interpret the short run and long run aggregate supply curves

Concept Introduction:

The total supply curve portrays the quantity of real GDP that is provided by the economy at various price levels. The short run total supply (SAS) curve is viewed as a substantial portrayal of the supply schedule of the economy just in the short run. The short run is the period that starts quickly after an expansion in the price level and that closures when input costs have expanded in a similar extent to the increment in the price level. The long run total supply (LAS) curve depicts the economy's supply schedule in the long run. The long run is characterized as the period when input costs have totally acclimated to changes in the price level of final merchandise.

Long run aggregate supply curve:

• Determined by the amount of capital & labour in the economy, and by the available technology

• Supply curve is vertical at the natural rate of output or equivalently potential output

• Natural rate of output is the amount of output produced when the economy is at full employment

Short run aggregate supply curve:

• In the short run wages and prices are sticky

• Aggregate supply is not necessarily equal to natural output

• Supply curve slopes upward