If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:4:35
AP.MACRO:
MOD‑2 (EU)
,
MOD‑2.E (LO)
,
MOD‑2.E.1 (EK)
,
MOD‑2.F (LO)
,
MOD‑2.F.1 (EK)
,
MOD‑2.F.2 (EK)

Video transcript

we've talked a lot about aggregate demand over the last few videos and so this video I thought I would talk a little bit about aggregate supply and in particular we're going to think about aggregate supply in the long run and in economics whether it's a micro or macro economics when we think about long-run we're thinking about enough time for a lot of fixed costs and a lot of fixed contracts to expire so in the short term you might be stuck into some labor contract or stuck into your using some factory that you've already paid money for so it was a fixed cost but over the long run you'll have a chance that factory will wear down and you'll have a chance to decide whether you want another factory or the price of the factory might change or in the long run you'll have a chance contracts will expire and you'll have a chance to renegotiate those contracts at a new price and so that's what we really mean when we talk about the long-run and so I'm going to plot aggregate supply on the same axis as we as we plotted aggregate demand and we're going to focus on the long-run now and then we're gonna think about what actually might happen in the short-run while we are in fixed price contracts or we already have spent money on something or we aree we have already in some ways there are sticky things that can't adjust as quickly but will first focus on the long-run so this axis I'm just going to plot price and remember we're thinking in macroeconomic terms this is the prices this is some measure of the prices of goods and services in our economy and this axis right over here the horizontal axis is going to be real GDP and that once again this is just a model you should take everything extract everything in economics the huge grain of salt these are oversimplifications of a highly highly complex theorem the economy millions and millions of actors doing complex things human beings each of them in their brain have billions and billions and billions of neurons doing all sorts of unpredictable things but economists like to make really simplifying super simplifying assumptions so that we can deal with in an attractive way and even deal in a mathematical way and so the assumption that economists often make when we think about aggregate supply and aggregate demand is in the long-run real GDP actually does not depend on prices in the long-run so what you have is regardless of what the price is you're going to have the same real GDP and you could kind of view this as a natural natural level of productivity for the economy so this is some level right over here that's important to realize this is just a snapshot in time and this is all else things equal so we're not assuming that we're having changes in productivity over time or or this is just a snapshot if we did have any of those things that change so for example if we had if the population increased then that would cause this level to shift to the right then we would have a higher natural level of productivity if for whatever reason we were able to create tools so that it was easier to find people jobs there's always a natural rate of unemployment that you know Peters frictions people have to look for jobs some people have to retrain to get their skills but maybe we improve that in some way so that there's some website where people can find jobs easier or easier ways to train for jobs and the natural level of unemployment goes down more people can produce that would also shift this curve to the right you could have a reality where there's technological improvements that would also then all of a sudden on an average people would become more productive that could shift things to the right you could have discovery of natural resources new land that is super fertile and everything else that could also shift things to the right you could have you could have a war and maybe your factories get bombed or you know about people you know bad things happen in a war factory you know especially if the war is on your soil and that could actually shift things that could actually shift things to the left so it's important to realize that this is just taking a snapshot in time and a lot of these other things that we think about would just shift it in one direction or another so I'm going to leave you there and you know this is a kind of it might not seem intuitive at first cuz you're saying wait look you know if prices were to change dramatically if all of a sudden everything in the economy got twice as expensive that would have some impact on people's minds and that they would they would but they would behave differently and all the rest and that might affect how much they can produce and and we did think a little bit about that when we thought about aggregate demand but when we think about aggregate somaye this supply we're just thinking about their capability to produce and we're saying all else equal we're saying that people's mind shifts aren't changing the willingness to work or isn't changing nothing else is changing technology isn't changing and given that price really is just a numeric thing if you just looked at the resources and the product the productive capability of a country the factors of production the people and all the rest regardless of what the prices are they in theory should be able to produce the same level of goods and services
AP® is a registered trademark of the College Board, which has not reviewed this resource.