Economics Micro & Macro (CliffsAP)

level. From point B to C, the price level begins rising as output increases. It is between these points that full employ-
ment is reached and passed. Between points C and D, the economy cannot sustain any more growth, thereby causing
the price level to rise without an increase in output.

Figure 4-4

Determinants of Aggregate Supply

According to the shape of the aggregate supply curve, output rises as the economy moves from range 1 to range 3. Let’s
now shift our attention to what makes the aggregate supply curve shift: input prices, changes in productivity, and gov-
ernment and environmental changes.

Input Prices

Input pricesare the costs that producers pay for resources. When producers have to pay a higher resource cost, aggre-
gate supply shifts to the left. Lower resource costs allow producers to make more of their product, thereby shifting the
aggregate supply curve to the right. The availability and efficiency of resources plays a key role in a firm’s production.
How a firm uses the factors of production dictates aggregate supply:

■ Land:Raw materials (such as oil and wood) are subject to availability for firms, meaning that the materials

must be available for purchase or in some way accessible. Land resources have the possibility of expanding if

new deposits are discovered or if technology helps us use less of what we already have.

■ Labor:The wages workers earn also play a key role in how much a firm produces. Changes in labor costs may

change the aggregate supply curve. Depending on labor availability and skill level, firms may have to endure

higher costs for labor, thereby increasing their production cost, which affects aggregate supply.

■ Capital:If the amount of capital (anything that is used to create another good or service) increases in an economy,

chances are aggregate supply will shift to the right. Machines and education (human and physical capital) are two

typical forms of capital. For example, if the level of education in the economy increases, productivity increases.

■ Entrepreneurial ability:Government incentives, market profits, and the amount of information about industries

can all motivate entrepreneurs to launch businesses. When entrepreneurs enter the market, they are increasing the

aggregate supply curve while creating competition and efficiency.

Changes in Productivity

Productivityis the relationship between a nation’s resources and its output. An increase in productivity allows a coun-
try to obtain more output from its resources. If a coal mine boosts productivity by increasing the number of hours

Price

Level

A

(Range 1)

(Range 3)

B

AS

D

C

Real GDP

Full

Employment

(Ran

ge

2

)

Part II: Macroeconomics