Chapter27MC - Chapter 27 Bringing in the Supply Side:...

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Chapter 27 Bringing in the Supply Side: Unemployment and Inflation? We might as well reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as  whether value is governed by [demand] or [supply]. ALFRED  MARSHALL
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2 The Aggregate Supply Curve Aggregate supply curve Each possible price level All nation’s businesses - willing to produce Specified period of time All other determinants – constant Aggregate supply curve Slopes upward 2
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3 An aggregate supply curve Figure 1 3 Real GDP Price Level S S
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4 The Aggregate Supply Curve Unit profit = Price – Unit cost Aggregate supply curve - slopes upward Firms – purchase inputs Prices – fixed for some period of time Higher selling prices – output Production – more attractive Aggregate supply curve Shifts outward/right More output produced Any given price level 4
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5 The Aggregate Supply Curve Aggregate supply curve Nominal wage rate – increase Higher real production costs Aggregate supply curve – shifts inward/left Prices of other inputs – increase Higher real production costs Aggregate supply curve – shifts inward/left 5
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6 A shift of the aggregate supply curve Figure 2 6 0 Real GDP (Y) Price Level (P) 6,000 5,500 S 0 (lower wages) S 0 S 1 (higher wages) S 1 100 A B
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7 The Aggregate Supply Curve Aggregate supply curve Decrease business costs Aggregate supply curve – shift outward/right Available supply of labor & capital – better Labor force - grows or improves in quality Capital stock – increases (investment) Aggregate supply curve – shifts outward/right 7
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8 Equilibrium GDP Aggregate demand curve intersects Aggregate supply curve Equilibrium price level Aggregate quantity demanded equals Aggregate quantity supplied 8
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9 Equilibrium of real GDP and the price level Figure 3 9 5,200 5,600 0 6,000 6,400 Real GDP (Y) 6,800 80 90 100 110 Price Level (P) 120 130 D D S S E
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10 For price level > Equilibrium price level Aggregate quantity supplied exceeds Aggregate quantity demanded Inventories – increase Prices – forced down Price level – falls Production – falls 10
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For price level < Equilibrium price level Aggregate quantity demanded exceeds Aggregate quantity supplied
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Chapter27MC - Chapter 27 Bringing in the Supply Side:...

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