Econ 104 1st Edition Lecture 23 Outline of Last Lecture I Changes in SRAS II Changes in LRAS III Shifts Outline of Current Lecture I Shifts in SRAS II Sticky Prices III Stagflation Current Lecture I II SRAS a SRAS shows the relationship in the SR between the price level and the quantity of real GDP supplied by firms b SRAS has a positive slope c When the price level rises firms will produce more output because input prices are sticky or fixed i Why are input prices sticky 1 It is difficult to predict future inflation when negotiating wages and prices of inputs a Wages and Prices of inputs are often set by contracts for one year or more b Menu Costs i The costs of firms of changing prices ii EX If AD is increasing in the US economy and you own a coffee shop The prices of the drinks will be increasing but your input costs will be slow to adjust d A rising price level leads to a larger quanity of goods and services supplied in the short run Shifts in SRAS a An Unexpected change in the price of an important natural resource These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute III i EX An increase in the price of oil supply shock would increase the cost of production and shift the SRAS curve to the left b Increase in the labor force and or the capital stock SRAS shift right i Firms can supply more at every price c Technological change i Increase productivity SRAS shifts right d An increase in the expected future price level SRAS i Workers will ask for a higher wage ii Firms will increase output prices e Workers and firms adjust to errors in the past expectations about the price level i If prices are higher than expected SRAS shifts left ii If prices are lower than expected SRAS shifts right Example of increase in AD a When there is an increase in AD i In the SR 1 An increase in G or decrease in r will cause the AD to shift to the right and there will be a shortage 2 Firms will step up production to try to meet the increase in AD expansion a Output prices rise relative to input prices 3 As output and prices increase the economy moves from E1 to E2 the SR equilibrium to where AD2 SRAS 1 ii From SR to LR 1 Workers and firms will adjust to the price level being higher than expected a Workers will ask for higher wages firms will increase their prices b As a result SRAS shifts left until Y Y bar at the new equilibrium AD2 SRAS 2 LRAS at E3 b When there is an decrease in AD i In the SR 1 An increase in G or decrease in r will cause the AD to shift to the right and there will be a surplus 2 Firms will cut production and lay off workers a Inventories build up and firms are forced to cut their prices Output prices fall surplus relative to input prices 3 As output and prices fall the economy moves from E1 to E2 the SR equilibrium to where AD2 SRAS 1 ii From SR to LR 1 Workers and firms will adjust to the price level being lower than expected a Workers will accept lower wages firms will accept lower prices b As a result SRAS shifts right until Y Y bar at the new equilibrium AD2 SRAS 2 LRAS at E3 2 IV Stagflation a Combination of inflation and recession i Prices up ii Output down 1
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