Macro Foundations · intermediate
What moves on the Aggregate Supply – Aggregate Demand diagram
Productivity gains lower unit costs (SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. right) and raise capacity (LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. right): more output at a lower price level.
Start at long-run equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. on LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level..
A technology improvement lets firms produce more output from the same inputs.
Unit costs fall. SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. shifts right; potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust. itself rises. LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. shifts right too.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: output rises and the price level falls, growth with disinflation, the 'good' supply shock.
Examiners ask this as: productivity boom, technological progress, automation improves efficiency, ai productivity, innovation wave.
Other scenarios on Aggregate Supply – Aggregate Demand