DEVIRING THE AGGREGATE SUPPLY CURVES
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Objectives
After studying this chapter, you will able to Derive the long-run aggregate supply curve Derive the short-run aggregate supply curve Explain the links between the production function and the aggregate supply curves
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate Supply Curve Figure A29.1(a) shows the labour market. Labour market equilibrium (full-employment equilibrium) occurs at a real wage rate of $35 an hour with 20 billion hours of labour employed.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate Supply Curve Figure A29.1(b) shows the production function. At full-employment equilibrium, with 20 billion hours of labour employed, real GDP is $1,000 billion. Potential GDP is $1,000 billion.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
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Deriving the Long-Run Aggregate Supply Curve Figure A29.1(c) derives the long-run aggregate supply curve. If the price level is 100 and the money wage rate is $35, the real wage rate is also $35. At this real wage rate, there is full employment and real GDP is $1,000 billion at point J. © Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate Supply Curve
If the price level is 120 and the money wage rate is $42, the real wage rate is still $35. Again there is full employment and real GDP is $1,000 billion at point I.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Deriving the Long-Run Aggregate Supply Curve If the price level is 80 and the money wage rate is $28, the real wage rate is still $35. Yet again, there is full employment and real GDP is $1,000 billion at point K. The LAS curve passes through the points I, J, and K. © Pearson Education Canada, 2003
© Pearson Education Canada, 2003
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Deriving the Long-Run Aggregate Supply Curve Changes in Long-Run Aggregate Supply Long-run aggregate supply can change for two reasons: Change in labour supply Change in labour productivity An increase in the population increases the labour force and increases the supply of labour. An increased supply of labour brings a fall in the real wage rate, an increase in employment, and an increase in potential GDP and long-run aggregate supply. © Pearson Education Canada, 2003
Short-Run Aggregate Supply Short-Run Equilibrium in the Labour Market Figure A29.2 shows the labour market in the short run. If the price level is 100 and the money wage rate is $35, the real wage rate is also $35 and there is full employment at point C.
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Short-Run Aggregate Supply If the price level falls to 87.5 but the money wage rate is fixed at $35, the real wage rate rises to $40. The quantity of labour demanded decreases to 15 billion hours and there is unemployment at point B.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply If the price level rises to 116.7 but the money wage rate is fixed at $35, the real wage rate falls to $30. The quantity of labour demanded increases to 25 billion hours and there is above full employment at point D.
© Pearson Education Canada, 2003
© Pearson Education Canada, 2003
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Short-Run Aggregate Supply Deriving the Short-Run Aggregate Supply Curve Figure A29.3(a) shows that equilibrium in the labour market depends on the price level. As the price level rises from 87.5 to 100, to 116.7, employment increases from 15 billion hours to 20 billion hours and then to 25 billion hours. © Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply Figure A29.3(b) shows the real GDP produced at 15 billion hours, 20 billion hours, and 25 billion hours of labour. As the price level rises from 87.5 to 100, to 116.7, employment increases from 15 to 20 to 25 billion hours and real GDP increases from $888 to $1,000 to $1,080 billion. © Pearson Education Canada, 2003
© Pearson Education Canada, 2003
Short-Run Aggregate Supply Figure A29.3(c) derives the SAS curve. As the price level rises from 87.5 to 100, to 116.7, the real wage rate falls from $40 to $35 to $30, employment increases from 15 to 20 to 25 billion hours and real GDP increases from $888 to $1,000 to $1,080 billion. © Pearson Education Canada, 2003
© Pearson Education Canada, 2003
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Short-Run Aggregate Supply
Changes in Short-Run Aggregate Supply Short-run aggregate supply can change for two reasons: Change in long-run aggregate supply Change in money wage rate
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Short-Run Aggregate Supply Short-Run Changes in the Quantity of Real GDP Supplied
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DEVIRING THE AGGREGATE SUPPLY CURVES
29
CHAPTER
A change in the price level, all other things remaining the same, brings a change in the quantity of real GDP supplied and a movement along the short-run aggregate supply curve. The Shape of the Short-Run Aggregate Supply Curve The SAS curve becomes steeper at higher price levels. The linear SAS curve is an approximation for small changes in the price level and real GDP. © Pearson Education Canada, 2003
THE END © Pearson Education Canada, 2003
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