IB Economics Topic 3.2.7 Alternative Views of Aggregate Supply Revision Notes (SL/HL)

IB Economics Topic 3.2.7 Alternative Views of Aggregate Supply Revision Notes (SL/HL) | RevisionDojo

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In section 3.2.5, we introduced the difference between the short-run and long-run in macroeconomics:

In the short-run, the cost of factors of production (especially wages) are fixed (they are not affected by changes in price levels).
In the long-run, the costs of factors of production are variable (they adjust to the price level).

There two main different views on how the aggregate supply looks like in the long-run:

The monetarist/new classical view.
The Keynesian view.

Note

There is not a "correct" view on the aggregate supply. Throughout the IB Economics course, you can use both interchangeably, as you may prefer.

Monetarist/new classical view of the long-run aggregate supply (LRAS) curve

The monetarist/new classical approach to aggregate supply focuses on the distinction between the short run and long run in macroeconomics.
It advocates that there is a different relationship between the aggregate supply and price level in the long-run and the short-run.
The relationship between the price level and aggregate supply in the long run is represented by the long-run aggregate supply (LRAS) curve (Figure 1 below).

As can be seen by Figure 1 above:

The LRAS curve is vertical at potential output (Yp).
Potential output is the level of output an economy produces in the long run, when all costs of production are variable.

Note

In Price Level vs Total Output diagrams, you can label the 'X axis' as:

Real GDP.
Y.

This is because, as we saw in our discussion of national income accounting, the national income (Y) = national output (real GDP).

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Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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In section 3.2.5, we introduced the difference between the short-run and long-run in macroeconomics:

In the short-run, the cost of factors of production (especially wages) are fixed (they are not affected by changes in price levels).
In the long-run, the costs of factors of production are variable (they adjust to the price level).

There two main different views on how the aggregate supply looks like in the long-run:

The monetarist/new classical view.
The Keynesian view.

Note

There is not a "correct" view on the aggregate supply. Throughout the IB Economics course, you can use both interchangeably, as you may prefer.

Monetarist/new classical view of the long-run aggregate supply (LRAS) curve

The monetarist/new classical approach to aggregate supply focuses on the distinction between the short run and long run in macroeconomics.
It advocates that there is a different relationship between the aggregate supply and price level in the long-run and the short-run.
The relationship between the price level and aggregate supply in the long run is represented by the long-run aggregate supply (LRAS) curve (Figure 1 below).

As can be seen by Figure 1 above:

The LRAS curve is vertical at potential output (Yp).
Potential output is the level of output an economy produces in the long run, when all costs of production are variable.

Note

In Price Level vs Total Output diagrams, you can label the 'X axis' as:

Real GDP.
Y.

This is because, as we saw in our discussion of national income accounting, the national income (Y) = national output (real GDP).

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 3.2.7 Alternative Views of Aggregate Supply Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Monetarist/new classical view of the long-run aggregate supply (LRAS) curve

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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Monetarist/new classical view of the long-run aggregate supply (LRAS) curve

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account