Answer to Question #148539 in Macroeconomics for John

Question

What makes the LAS curve different from the SAS curve? What are the assumptions made here?

Answer 1

Solution:

The aggregate supply curve shows the total supply in an economy at different price levels. It can also be depicted as the quantity of real GDP that is supplied by the economy at different price levels. Typically, the aggregate supply curve slopes upwards; a higher price level encourages firms to supply more. However, there are various possible slopes for the aggregate supply curve, including vertical. There are two types of aggregate supply curves: The short-run aggregate supply curve and long-run aggregate supply curve.

The short-run aggregate supply curve (SAS) is generally an upward slope. The short-run is when all production happens in real-time. The short-run is the period that starts immediately after an increase in the price level and ends when input prices have increased in similar proportion to the increase in the price level. In the short-run, the capital is fixed, and companies can employ more labor to react to the short-run increases in demand. The curve in the short-run is generally drawn as a straight line.

The long-run aggregate supply (LAS) curve is normally perfectly vertical, depicting the fact that long-run aggregate supply is not affected by changes in the price level. This is because economists trust that aggregate demand changes only change an economy's total output temporarily. The LAS curve describes the economy's supply schedule in the long-run. The long-run refers to the period when input prices have completely adjusted to the changes in the price level of completed goods.

The assumptions made in the LAS and SAS curve include the followings:

·        The LAS curve is assumed to be vertical, which means that it does not change when the general price level changes. It is also assumed that the increase in prices that sellers receive for their final goods is completely offset by the proportional increase in the prices that sellers pay for inputs.

·        The SAS curve is assumed to be upward sloping, which means that it is affected or sensitive to the general price levels' changes. It also assumed that the input providers could not take account of the increase in their inputs' cost. The higher the price level, the more these sellers will be willing to supply.