Short-run supply and two long-run models
| English | 中文 | Pinyin |
|---|---|---|
| short-run aggregate supply/ʃɔːt rʌn ˈæɡrɪɡeɪt səˈplaɪ/ | 短期总供给 | duǎn qī zǒng gōng jǐ |
| long-run aggregate supply/lɒŋ rʌn ˈæɡrɪɡeɪt səˈplaɪ/ | 长期总供给 | cháng qī zǒng gōng jǐ |
A decision you can investigate
- Firms may raise production as the general price level rises with some costs fixed. A rise in energy costs changes the schedule itself. Longer-run capacity models make different assumptions about slack.
- The time horizon and model shape matter.
Build the explanation
- Short-run aggregate supply 短期总供给 (SRAS) relates planned economy-wide real output to the general price level. With relevant costs and determinants unchanged, a price-level change moves along a given supply curve. Higher raw-material or energy costs, cost-changing exchange rates or production taxes can shift SRAS left/up; lower costs can shift it right/down. Do not shift AS merely because output rises along its curve.
- In the classical model, long-run aggregate supply 长期总供给 (LRAS) is vertical at potential output determined by productive resources and technology; a higher price level alone does not permanently raise that capacity. A Keynesian AS representation has a low-output region with substantial spare capacity, a rising region as bottlenecks grow and a steep/vertical region near full capacity. The shapes imply different price/output responses to AD shifts.
Work through the evidence
- A fictional firm pays for 100 dollars of imported energy. A quote changing from 5 to 6 local units per dollar raises that bill from 500 to 600. With selling prices and other determinants fixed, higher production cost can shift the economy’s SRAS adversely if sufficiently widespread; one firm alone does not establish an economy-wide magnitude.
- For a separate classical long-run illustration, potential real output is 100. An AD increase changes the long-run intersection from price index 100 to 110 at output 100, with capacity unchanged. In a spare-capacity Keynesian region, an AD increase can instead raise output from 60 to 80 with little price pressure, subject to the assumed flat segment. These are distinct models, not two measured forecasts for one economy.
What is the new energy bill in local currency?
100 dollars times 6 local units per dollar equals 600.
What happens to classical long-run output in the stated fixed-capacity AD example?
Vertical LRAS fixes potential output when its determinants do not change.
The Keynesian and classical supply representations assume the same response in every capacity region.
Spare-capacity and fixed-potential-output assumptions imply different price/output responses.
Test the limits
- The Keynesian flat segment is an idealization; prices and wages need not be perfectly fixed. The classical LRAS model abstracts from transition, unemployment and demand-side hysteresis. Distinguish short-run output from sustainable capacity.
- Exchange depreciation can raise import costs and shift SRAS left, while export demand changes AD; show both channels rather than confusing their curves. Different taxes affect costs and incentives differently. A VAT or production levy is not interchangeable with an income-tax change. Explain which cost is affected, the scale, pass-through and horizon before drawing a shift.
Which is a supply-curve shift rather than a movement along it?
A changed cost determinant changes the schedule.
Apply and explain your answer
- Why does a vertical LRAS not rule out a short-run output response to higher spending?
- It describes long-run capacity under the model; short-run output can deviate while adjustment occurs.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- short-run aggregate supply: Planned real national output at different price levels under the stated short-run cost conditions.
- long-run aggregate supply: Sustainable real output under the stated long-run productive-capacity model.
A fictional firm pays for 100 dollars of imported energy. A quote changing from 5 to 6 local units per dollar raises that bill from 500 to 600. With selling prices and other determinants fixed, higher production cost can shift the economy’s SRAS adversely if sufficiently widespread; one firm alone does not establish an economy-wide magnitude. For a separate classical long-run illustration, potential real output is 100. An AD increase changes the long-run intersection from price index 100 to 110 at output 100, with capacity unchanged. In a spare-capacity Keynesian region, an AD increase can instead raise output from 60 to 80 with little price pressure, subject to the assumed flat segment. These are distinct models, not two measured forecasts for one economy.
The Keynesian flat segment is an idealization; prices and wages need not be perfectly fixed. The classical LRAS model abstracts from transition, unemployment and demand-side hysteresis. Distinguish short-run output from sustainable capacity. Exchange depreciation can raise import costs and shift SRAS left, while export demand changes AD; show both channels rather than confusing their curves. Different taxes affect costs and incentives differently. A VAT or production levy is not interchangeable with an income-tax change. Explain which cost is affected, the scale, pass-through and horizon before drawing a shift.
Short-run aggregate supply (SRAS) relates planned economy-wide real output to the general price level. With relevant costs and determinants unchanged, a price-level change moves along a given supply curve. Higher raw-material or energy costs, cost-changing exchange rates or production taxes can shift SRAS left/up; lower costs can shift it right/down. Do not shift AS merely because output rises along its curve.