Macroeconomics
● TechnologicalAdvancements: Technologicalprogresstypicallyleadstoincreasedproductivity andeffciencyinproductionprocesses,reducingproductioncosts.Asaresult,theeconomycan producemoregoodsandservices,increasingitsproductivecapacity.Thisisreflectedbyashift of the SRAS to the right. ● Supply Shocks (also known as Cost Shocks): These occur when there is a large and unexpectedchangeinthepriceand/orquantityofresources .Naturaldisasters,forexample, reducethequantityofavailableresourcessignifcantly,leadingtoadecrease(shifttotheleft)of the SRAS at every price level. Other common supply shocks include signifcant increases in wage rates and energy prices . For instance, a hike in the price ofoil,arawmaterialusedin most productions, or an increase in workers’ wages, reduces SRAS. ● ChangesinInputPrices: Achangeinthepriceorcostofresourcesandrawmaterialsusedin production (e.g., steel) affects suppliers’ production costs. An increase in these prices raises production costs which results in lower SRAS (shift to the left), and vice versa. ● Changes in Labor Force and Productivity: Anincreaseinlaborproductivitymeansthatmore outputisproducedperworker.Thisincreasestheeconomy’sproductivecapacityandallowsfor an increase in SRAS. In addition, a larger and more skilled workforce can enhance productivityandallowforgreateroutput atanygivenpricelevel.Thiscanresultfromfactors such as immigration, changes in education and training, and shifts in demographics. ● Changes in Government Regulations and Policies: Government regulations can affect productioneffciency.Ifregulationsarerelaxed,itcanincreaseproductivecapacity.Conversely, stricter regulations can decrease capacity. Moreover, government policies that affect suppliers’ production costs also impact SRAS . For example, imposing higher taxes onfrms increases their production costs thus discouraging an increase in output, and vice versa. Alternatively, subsidies encourage frms to produce more, shifting their SRAS curve to the right. ● Expectations: When frms expect a change in the price of factors of production, they act accordingly. For instance, when suppliers expect the price of resources to drop, theyplanfor increasing their supply which shifts the SRAS curve to the right. Long-Run Aggregate Supply (LRAS) Inthelongrun,flexibilityincreasesaswagesandpricesstopbeingstickyasitwasthecaseinthe short run . Therefore, the long-run aggregate supply (LRAS) represents the relationshipbetweenreal GDPandchangesinthepricelevel whentherehasbeentimeforinputpricestoadjusttochangesin aggregate demand . The long-runaggregatesupplycurve(LRAScurve) representsapointonthecountry’sPPC .Recallthat every point on the PPC represents the maximum capacity for production in an economy given the current stock of resources. The long-run aggregate supply curve is a vertical line where the economy operates at full employment (Y f ) or full capacity.
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