How long is short run aggregate supply

Current timeTotal duration Google Classroom Facebook Twitter. Video transcript In the last two videos, we've been slowly building up our aggregate demand-aggregate supply model and the whole point of us doing this is so that we can give an explanation of why we have these short run economic cycles and we don't just have this nice steady march of economic growth due to population increases and productivity improvement.

It's important to realize and it's probably important to realize this for all of what we study in micro and macro economics that this is really just a model. In order for to use these models, we have to make huge, huge simplifications and you really should always view these models with a critical eye. This is just one way to view it. You might not agree with it. You might think it's an over simplification.

You might want to modify it in some way. It's very important that you just view it only as a model and the reason why we do that is so that we can start to describe very, very, very complicated things with fairly simple graphs and mathematics so that we can get our brain around something as complicated as the economy. Something that has hundreds of millions of actors, each of them with tens of billions of neurons in their brain and doing all sorts of crazy things.

We're able to distill it down to simple lines and curves and equations. Now in the last video, we looked a little bit at the long run aggregate supply.

Aggregate supply in the long run. In the ADAS model, we assumed that in the long run, the real productivity of the economy really doesn't depend on price, that price is really just a numeric thing and in the long run, people will just adjust to producing or the economy will just adjust to producing what it's capable of comfortably producing.

Now there's one thing I want to stress here. This is not the maximum productivity of the economy. You could view this as the natural; let me put it this way. You could view this as the, so this right over here, you could view it as the natural output. Natural, the natural real output of the economy.

When I say natural, it means that there's always going to be some inefficiencies in the economy; people are going to be switching jobs.

They might have to retrain. There's always going to be turnover in things. Some people pass away in a job and then they have to hire other people. There's some normal or natural rate of unemployment.

In most economies, people aren't working night and day. They want to take some time off. They want to be able to rest. Because of other interventions, there aren't perfect efficiencies in the economy as a whole. This is just a natural healthy level of output.

There is some theoretical level of output. I'll draw that here. This is maybe some theoretical level of output that you could maybe view as maximum output. Maybe I'll draw it right over here. This right over here might be maximum output. Maximum, given the population and the technology that the population has, this is some type of theoretical thing and it would be very hard to actually quantify. People were just working all out.

They weren't taking vacations. They weren't sleeping properly. Every person was working in the place that they could be the most productive, then maybe you would have some output over here which is kind of impossible to achieve. This is something below that, kind of a nice healthy level of output for the economy.

Now what we're going to talk about in this video is aggregate supply in the short run and what we're going to see is for this model to work, for the aggregate demand-aggregate supply model to work, we have to assume an upward sloping aggregate supply curve in the short run. It might look something like this. The Supply Crunch Student Videos. Output Gap and Unemployment Student Videos. Indirect Taxes Student Videos. Aggregate Supply Study Notes. From the Blog. The "pingdemic", self-isolation and short run aggregate supply 20th July Cost-push inflation - Building projects hit by lack of supplies and price rises 26th May Measure content performance.

Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. What Is Aggregate Supply? Key Takeaways Total goods produced at a specific price point for a particular period are aggregate supply.

Short-term changes in aggregate supply are impacted most significantly by increases or decreases in demand. Long-term changes in aggregate supply are impacted most significantly by new technology or other changes in an industry.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time. Why Minimum Efficient Scale Matters The minimum efficient scale MES is the point on a cost curve when a company can produce its product cheaply enough to offer it at a competitive price.

Pigou Effect Definition Pigou effect is a term in economics referring to the relationship between consumption, wealth, employment, and output during periods of deflation. Long Run Definition The long run refers to a period of time where all factors of production and costs are variable, and the goal is to produce at the lowest cost. Change In Supply Definition Change in supply refers to a shift, either to the left or right, in the entire price-quantity relationship that defines a supply curve.