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Defining sras and lras

In the Clear It Up feature titled “Why does AS cross potential GDP?” we differentiated between short run changes in aggregate supply which are shown by the AS curve and long run changes in aggregate supply which are defined by the vertical line at potential GDP. In the short run, if demand is too low (or too high), it is possible for producers to supply less GDP (or more GDP) than potential. In the long run, however, producers are limited to producing at potential GDP. For this reason, what we have been calling the AS curve, will from this point on may also be referred to as the short run aggregate supply (SRAS) curve    . The vertical line at potential GDP may also be referred to as the long run aggregate supply (LRAS) curve    .

Key concepts and summary

The upward-sloping short run aggregate supply (SRAS) curve shows the positive relationship between the price level and the level of real GDP in the short run. Aggregate supply slopes up because when the price level for outputs increases, while the price level of inputs remains fixed, the opportunity for additional profits encourages more production. The aggregate supply curve is near-horizontal on the left and near-vertical on the right. In the long run, aggregate supply is shown by a vertical line at the level of potential output, which is the maximum level of output the economy can produce with its existing levels of workers, physical capital, technology, and economic institutions.

The downward-sloping aggregate demand (AD) curve shows the relationship between the price level for outputs and the quantity of total spending in the economy. It slopes down because of: (a) the wealth effect, which means that a higher price level leads to lower real wealth, which reduces the level of consumption; (b) the interest rate effect, which holds that a higher price level will mean a greater demand for money, which will tend to drive up interest rates and reduce investment spending; and (c) the foreign price effect, which holds that a rise in the price level will make domestic goods relatively more expensive, discouraging exports and encouraging imports.

Problems

Review the problem shown in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, [link] shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

Price level: ad/as
Price Level AD AS
110 700 600
120 690 640
130 680 680
140 670 720
150 660 740
160 650 760
170 640 770
  1. Plot the AD/AS diagram from the data shown. Identify the equilibrium.
  2. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.
  3. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?
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The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as shown in [link] .

Price level: ad/as
Price Level AD AS
100 700 200
120 600 325
140 500 500
160 400 570
180 300 620
  1. Plot the AD/AS diagram. Identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect concern about inflation in this economy to be relatively high or low?
  4. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.
  5. How will the shift in AD affect the original output, price level, and employment?
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Santher is an economy described by [link] .

Price level: ad/as
Price Level AD AS
50 1,000 250
60 950 580
70 900 750
80 850 850
90 800 900
  1. Plot the AD/AS curves and identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect prices to be a relatively large or small concern for this economy?
  4. Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium.
  5. How will the shift in AS affect the original output, price level, and employment?
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Questions & Answers

The difference between cyclical unemployment and structural unemployment
Prince Reply
Cyclical unemployment .it has to do with an increase in the quantity of good demanded or there is over production which result in fall in prices. Industries will be affected it will now causes retrenchment of workers in the industries while structural unemployment arises as a result of slight change
Adeoti
In the industrial structure of a countries workers wil now be retren
Adeoti
Will now be retrenched as a result of economic recession... That is the little i knw....
Adeoti
what is the condition of a consumer behaviour in the equilibrium under the theory of consumer behaviour
Sahr Reply
what is equilibrium
Sahr
A point where quantity demand & supply meets called equilibrium
Hasham
a state is said to be equilibrium when there is no tendency of movement.
Nibedita
Pls @Nibedita am confused
Prince
The state of balance achieved by an end user of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income.
Okwori
where is the calculations?
Nathan Reply
what are the two conditions for aconsumer to be in the equilibrium under the theory of consumer behaviour in
Sahr
Economic equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point at which supply equals demand for a product,
vinay
Hello there, let's make a time to chat about econimics and its issues.
DA Reply
it's true
Adamsvictor
hie Sir /Madam l need help when it comes to Economics lm doing it for the first time
Thembelani
So, share your problems that you have in terms of economis and we will discuss on it.
DA
Basic Economic problems
Thembelani
what is the Basic Economic problem
Thembelani
what is the Basic Economic problem
Thembelani Reply
scarcity
Rhaiymornd
a bit of explanation please its my first year doing Economics
Thembelani
rare, limited. economic agents eg You dube, the govt & the business entities wants to maximise their utility/satisfaction but because limited resource or scarcity of such resources they are unable to satisfy their needs.
ian
thank u Sir , l understand what you are saying now
Thembelani
limited resources; you wanna take the most benefits from the minimum resource.
DA
if u ar a fresher, eco has to 2 fundamental parts "micro & macro". micro(small) this is were the economc agents ar discussd, economc systms, dmand & supply, typs of market systms etc and the macro (big) part the elucidates the functns of central bank, typs of employmnt, functns of money & int trade.
ian
there is an old adage that says "a picture is worth a thousand words" economics is full of graphing so it requires on the side of the student to master the art of keeping information in form graphs.
ian
oky Sir
Thembelani
scarcity becomes the fundamental problem of economics because of limited resources, when we take an individual, he or she has many wants, thus unlimited wants but can never satisfy all but only few.
Rhaiymornd
now when we take a firm, a firm maybe willing to produce two or more product into the market but due to limited resources they only produce one. the same way if we take the government, he or she maybe willing to bring development either through infrastructures,
Rhaiymornd
that is when consumer decision making rule comes in
Olusegun
choice arises as a result of scarcity of resources
Olusegun
so if we look through, the individual, firm and government, their wants are unlimited but due limited resources, all of their wants cannot be satisfy. therefore scarcity can be term as limited in supply of resources. scarcity is not lack of resources but insufficient resources
Rhaiymornd
there is a marriage with the following; scarcity, factors of production, opportunity cost curve (occ) or (ppc, ppf, tc) production possibility curve productn possibility frontier transformation curve. The OCC, PPC, PPF & TC explains the decisions made by householders, firms & the govt.
ian
opportunity cost also arises as a result of firm willing to produce a particular commodity but resources use in satisfying or producing such output is limited
Olusegun
wat ar those decisions? the most important is WHY nations economise tht is if they hav abundancy of factors of productn eg land, labour & entreprise? now since all of us have unlimited needs against few resourcs PPC, PPF, TC, OCC walks in to make wise allocatn of resources.
ian
how do those decisions made? eg by economic agents; a. Household (You) - if u have R10 & wish to buy a book & a pen & realise that both commodities seĺl at the same price which of the two (2) can u buy (necesity) and which one can u forgo (not all tht important).
ian
b. firms - they allocat mo resourcs to all thoz commoditz tht they think will yield mo profit. c. Govt - if the govt SA was to come in yo area which 1 would u think they can consider first tht can benefit the majority & the minority. So instead of building football stadium they construct a hospital.
ian
if the SA govt had enough resources they would have built both the stadium and the hospital but because of scarce in terms of resources they had to forgo the construction the stadium to build a hospital which is necessary for the majority to benefit.
ian
Opportunity cost well broken down..
Andres
opportunity cost means the lose of other alternatives when the alternative is chosen
saad Reply
is the benefits that you loose by not selecting a certain alternative.
EDWINY
individual wants maybe unlimited, but means to satisfy them are limited there one has to forgo some alternative in order to acquire other alternative and it must according priority, that is when scale of preference set in for individuals to make choice
Rhaiymornd
hello everyone
Aliyu
Next best alternative forgiven
Shoaib
demand is the amount of goods and services that consumer is willing and able to purchase at a particular prices over given period of time
Rhaiymornd Reply
yep
Abraham
what's demand?
labi Reply
What customers want the most...
Abraham
not only what customers wants, want is just mere desire but demand is backed by purchasing power, ability and willingness
Rhaiymornd
thanks
Abraham
What's opportunity cost?
Abraham
what are the differences between demand and supply
Zakariyah Reply
who is called lender of the last resort
Divyanshu Reply
Hi
Linda
hlw
Karishma
Central bank
Majeed
hy
Karishma
Hello
Majeed
hy
Karishma
How are you
Majeed
Am gud
Linda
fine
Karishma
Am gud
Linda
hello
Chandra
Well! what's going on
Majeed
r u study in economics
Karishma
anybody there?
Chandra
r u study in economics
Karishma
the central bank
Sessay
Has completed already
Majeed
hey
neha
yes
Abigail
Yesss
Majeed
ok
Karishma
hey
Doctor
yh
Abigail
more questions
Sessay
how ar you
Doctor
split the price effect into income effect and substitution effect
Karishma
fine and u
Abigail
Hi
Godwin
hi
Hey, I am new here. Hope, discussion on Economics will clear our concepts more.
yasir
yes
Abigail
do u speak hindi or english
Karishma
how to consumer equlibrium through ic
Karishma
consumer equilibrium demand equals supply
Kenneth
the consumer is in equilibrium when the indifference curve is tangential to the budget line. or when the BL and IC intersect
Sessay
reasons indifference curve slopes downwards?
Kenneth
fine Abby any good,
Doctor
ur lost
Doctor
hey. im new year. economics teacher how we can discuss some thing interesting.
EDWINY
which one
Doctor
what do u understand the concept of poverty cycle.
EDWINY
hey
Ebong
I'm New here
Ebong
hi
ian
just new here guy's and also an Economics fresher of Kogi State University Anyigba
nelson
wxup
Ayegba
who can tell the laboratory of economic?
Amara
, Dennis Weissman Associates, LLC Laboratory Economics is the monthly business newsletter that gets behind the headlines and press releases.
Ayegba
sooo teah me what an LLC
Emmanuel
what's the topic
Adamsvictor Reply
economic systems
gracious
hello
Antonio
market
aba
hello where can I find the diagrams
Manu
Hello I am totally out ,I am not understanding why we are here. can someone help me out?
Amara
why Economic is not a pure science can someone help me out
Mohamed
because economics like science put forth a some hypotheses and then do experiments to prove them
Anwesh
but these experiments are not completely controlled
Anwesh
Hello
Comfort
hey
suraj
hi people can you help me out on "demand and supply"
Milton
Am not understanding can someone enlighten me pls
Bertilla
hi people can you help me out on "demand and supply"
Sessay
hello. if Mr.Patrick's income is #900.00 while that of Mr.Shodawe is #1300.00 if Mr.Patrick and Shodowe pay #90.00 and #130.00 as taxes,the tax system is?
Benjamin
I need the answer please
Benjamin
regressive tax system
shaikh
OK thanks
Benjamin
Isn't this called proportional tax rate because the rate stays the same - 10%? Tell me if I'm wrong
Ioan
Supply is perfectly elastic and demand increases.
kishore Reply
whose there
Waseem
show the demand curve
Hameed Reply
it slopes downward from left to right
Ama
how resources are allocated in a free economy
Charlotte Reply
explain how discriminating Monopoly increase profits
Charlotte
factors responsible for the emergence of monopoly situation
adelakun Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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