Unit 5: Short Run and Long Run AS

Short Run Aggregate Supply 

• In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

Effects over Short-Run

• In the short-run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.
• In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model

• The extended model means the inclusion of both the short and long run AS curves.

Demand Pull Inflation in the AS 

• Prices increase based on increase in aggregate demand
• In the short run, demand pull will drive up prices and increase production.
• In the long run increase in aggregate demand will eventually return to previous levels.

Cost Push

• Arises from factors that will increase per unit costs such as increase in the price of a key resource.

Dilemma for the government 

• In an effort to fight cost push, the government can react in two different ways.
• Action such as spending by the government could begin an inflationary spiral.
• No action however could lead to recession by keeping production and unemployment levels declining.