Econ 104 1st Edition Lecture 23Outline of Last Lecture I. Changes in SRASII. Changes in LRASIII. Shifts Outline of Current Lecture I. Shifts in SRASII. Sticky PricesIII. Stagflation Current LectureI. SRASa. SRAS shows the relationship in the SR between the price level and the quantity ofreal 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 fixedi. 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 Costsi. 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 runII. 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.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 leftii. If prices are lower than expected, SRAS shifts right III. Example of increase in AD a. When there is an increase in AD i. In the SR1. 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 1ii. From SR to LR1. 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 E3b. When there is an decrease in AD i. In the SR1. An increase in G or decrease in r will cause the AD to shift to the right and there will be a surplus2. Firms will cut production and lay off workersa. Inventories build up and firms are forced to cut their prices. Output prices fall (surplus) relative to input prices3. As output and prices fall, the economy moves from E1 to E2, the SR equilibrium, to where AD2 = SRAS 1ii. From SR to LR1. Workers and firms will adjust to the price level being lower than expecteda. 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 E32.IV. Stagflation a. Combination of inflation and recession i. Prices upii. Output down
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