Perhaps you've heard that they recently developed a new-fangled form of duct tape that's certain to revolutionize duct tape as we know it. This revolutionary development has, however, created a "situation" that we, pedestrian explorers of the economy, should consider. Mona Mallard's new duct tape uses "quagliminium," a relatively limited mineral found only in the quaint and courteous Republic of Northwest Queoldiola.
Prior to this duct tape development, quagliminium had only one use, as lubricant for OmniStraight shoestring straighteners. The Northwest Queoldiolan supplies were sufficient to lubricate shoestring straighteners well into the year As a duct tape input, though, quagliminium deposits will be exhausted in a scant 50 years.
Should we, could we, allow Mona Mallard to exhaust the supply of quagliminium? If they do, how will future generations lubricate their shoestring straighteners?
Should we call for a moratorium on quagliminium use? Visit the PEDestrian's Guide. This shock shifts the AD relation outward. Initially there is an excess demand for goods A to B evidenced by a depletion of inventories. Given that potential output has not changed, in time this excess demand will cause the price level to increase.
As prices increase, purchasing power falls and the ability to spend decreases B to C. The net result of this shock is an increase in the price level with no change in output or real spending.
Expectations about the agent's own price are derived by that agent based on observations about the general price level: An equation for short-run Aggregate Supply AS can be defined as:. In time these economic agents will discover that the price of their particular good has not changed relative to the price of other goods in the economy.
These agents will discover that they have made incorrect production decisions i. In summary, the only way a change in the price level can affect supply production decisions in an aggregate economy is if the price level ' P ' exceeds that expected ' E[P] ' by individual producers.
Ultimately changes in potential output are the result of changes in the available of resources or productivity and technology.
Determinants of Aggregate Supply. Changes in labor force: Anything that causes the amount of workers to increase in an economy will cause aggregate supply to increase or shift to the right. If the labor force decreases, the overall supply of goods and services will decrease also.
Aggregate supply determinants are held constant when the aggregate supply curves are constructed. A change in any of these determinants causes a shift of either the short-run aggregate supply curve, the long-run aggregate supply curve, or both.
Learn aggregate supply determinants with free interactive flashcards. Choose from different sets of aggregate supply determinants flashcards on Quizlet. Long Run Aggregate Supply Aggregate Supply represents the ability of an economy to produce goods and services. In the Long Run this ability to produce is based on the level of production technology and the availability of factor inputs. As stated earlier, production refers to the conversion of inputs -- the factors of production into desired output.
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