Aggregate Supply: Long and Short Run
Country's prosperity depends on:
1. Good institutions
2. Fundamental factors of production
Economic Growth is not a smooth process:
Real GDP in the UK shrank by 4% in 2009 and grew by 2% in 2015. In
2020 it shrank by around 10%.
The inflation rate in the UK was 4.5% in 2011 and 0% in 2015. The
Consumer Price Index (CPI) 12-month inflation rate was 10.1% in January
2023.
AD-AS Model:
Components of this model -
Quantity Supplied and Supply:
The quantity of real GDP supplied is the total quantity that firms plan to
produce during a given period.
Aggregate supply is the relationship between the quantity of real GDP
supplied and the price level.
Aggregate Supply Time Frames:
We distinguish two time frames associated with different states of the labour
market:
1. Long run aggregate supply: not everything is flexible, no fixed factors of
production therefore no fixed costs.
The macroeconomic long run is a time frame that is sufficiently long for all
adjustments to be made so that real GDP equals potential GDP and full
employment prevails.
Country's prosperity depends on:
1. Good institutions
2. Fundamental factors of production
Economic Growth is not a smooth process:
Real GDP in the UK shrank by 4% in 2009 and grew by 2% in 2015. In
2020 it shrank by around 10%.
The inflation rate in the UK was 4.5% in 2011 and 0% in 2015. The
Consumer Price Index (CPI) 12-month inflation rate was 10.1% in January
2023.
AD-AS Model:
Components of this model -
Quantity Supplied and Supply:
The quantity of real GDP supplied is the total quantity that firms plan to
produce during a given period.
Aggregate supply is the relationship between the quantity of real GDP
supplied and the price level.
Aggregate Supply Time Frames:
We distinguish two time frames associated with different states of the labour
market:
1. Long run aggregate supply: not everything is flexible, no fixed factors of
production therefore no fixed costs.
The macroeconomic long run is a time frame that is sufficiently long for all
adjustments to be made so that real GDP equals potential GDP and full
employment prevails.
