The aggregate supply curve

### Introduction – The aggregate supply curve shows output (=GDP) as a function of the price level. – The curve rises from left to right. – As wages rise, more people join the labor force and output increases. ### Effects of wages on the price level – It is generally assumed that the price level is affected mainly by the wage level or excess demand for goods and services. – When wages rise, the price level rises. We will assume that the price level rises in the same proportion as the increase in wages. ### Potential output – Potential output, symbol (`YP`), is a term that refers to the output obtained when the economy is at full employment. – Potential output also has synonyms: Full employment, Natural Level (of GNP). ### Full employment and frictional unemployment – Full employment is defined as a situation in which the entire labor force is employed, except for some percentage of workers, ranging from 4 %-6% of the labor force, who are in the stage of searching for a suitable job. – Unemployment Which originates from searching for a suitable job is called frictional unemployment. – Full employment is a situation in which there is no unemployment except for frictional unemployment. ### Long-run supply curve (LRS) – It is customary to present the curve as a vertical line rising from potential output as shown in Figure 101.
– In the long run, the economy will be at full employment and the scope of output will be determined according to the size of the labor force.
– In this situation, a price increase cannot increase output because supply is rigid.  ### Short-run supply curve (SRC) – Economists present mainly 3 alternatives for the curve’s path. #### Alternative 1 (Figure 103) – The curve rises from left to right when the economy can produce output in the short term that exceeds potential output due to the abnormal utilization of factors of production. – The abnormal utilization of factors of production is called: point effort.  #### Alternative 2 (Figure 104) – Economists who adopt Alternative 2 claim that trade unions are strict about both tightening wages and working conditions so that it is not possible to deviate from routine working conditions. – There is no possibility To exercise a point effort.  #### Alternative 3 [Figure 105] – Alternative 3 is very similar to Alternative 2, but with a little more flexibility regarding wage uniformity and workers’ harnessing to point effort. – Can deviate somewhat, to the right of `Sa`, but again becomes vertical at any wage level beyond the small deviation from `YP`.  – Economists who adopt Alternative 2 also argue that if the demand curve `Da` intersects the supply curve at the vertical part as shown in Figure 106, then from now on the horizontal part of the supply curve will rise from `P_0` (On date A) to `P_1` (dashed line).