The two phases

The two phases - AS 1 is the original supply curve and AS 2...

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The two phases: The two phases need some explanation. Initially, at the low levels of output produced and supplied, a very small proportion of available resources is utilized. So long as labor, plants and equipment , land etc. are underutilized or unemployed, marginal cost of employing them is relatively low. Therefore more and more output can be produced and supplied with reasonably small rises in the price level . But as resource utilization tends to a fuller level, the marginal cost of employing resources starts rising sharply. Ultimately, when all available resources are exhausted, the condition of no further supply of real goods and services is reached (that is the full employment level). If the price level beyond this point continues to move upward it can no more induce additional production and supply. Rising price level will then be purely inflationary without adding any more to the output level . Aggregate supply curve may shift upwards (leftward) or downwards (rightward). In figure 13 O-
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Unformatted text preview: AS 1 is the original supply curve and AS 2- AS 2 is the new upwards or leftwards shifted Aggregate Supply curve. On the new supply curve at a given price P 1 aggregate supply has decreased from q 1 to q 2 . If we were to start initially from O-AS 1 curve then O-AS would have been a rightward or a downward shifted supply curve showing greater quantity supplied at a given price level. Such shifts in the supply curve are caused by a variety of dynamic changes taking place in the economy. Technological improvements, skill development of labor, innovation, foreign trade prospects are some of examples of it. These factors may cause either favorable or unfavorable effects on the supply conditions. Their unfavorable nature causes an upward shift and favorable effects lead to a downward shift. In the long run, a downward shift in the aggregate supply conditions is normally experienced when an economy has been making progress and development....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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The two phases - AS 1 is the original supply curve and AS 2...

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