Aggregate Supply

Determinants:
-Change in cost of the factors of production
-Change in availability of natural resources
-Change in real capital
-Change in technology
-Change in labour
      • The last 4 shift potential GDP and grow economy**


Definition - Total value of final goods and services sellers are willing and able to sell at various price levels.


Changes in Supply:
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  1. Cost of Production Decreases => AS Increases
  2. Availability of Natural Resources Increases => AS Increases
  3. Real Capital Increases => AS Increases
  4. Technology Increases => AS Increases
  5. Quantity or Quality of Workers better => AS Increases

*If AS increases then inflation decreases and economy grows*

The changes in #1 only shift AS and an example below is shown to demonstrate.
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The changes in #2 to #5 shift AS and grow potential GDP which is the value of all final goods and services in an economy if all of our resources are utilized. An example is shown below to demonstrate.
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If you are using Aggregate Supply to close a Recessionary Gap then you must:
  • Increase AS by:
    • Decreasing Business Taxes
    • Decrease Minimum Wage

If you are using Aggregate Supply to close a Expansionary Gap then you must:
  • Decrease AS by:
    • Increasing Business Taxes
    • Increasing Minimum Wage

*When closing expansionary gaps with AS you must be careful because it can lead to more inflation or higher prices causing an even worse expansionary gap. Use AD before AS.

All information used is from in-class lectures:
S. Powers, "Aggregate Demand and Aggregate Supply" (lecture, Red Deer College, Red Deer, AB, March 19th, 2012).**