Economics Micro & Macro (CliffsAP)

worked per week, the coal mine is contributing to an aggregate increase in output. Productivity is different than effi-
ciency; efficiencyis using productivity to allocate resources to meet demand. We will discuss efficiency in more detail
later.

Government and Environmental Changes

Governments can influence aggregate supply by altering taxing or subsidy policies. A government may choose to increase
or decrease taxes, thereby limiting or increasing a firm’s output. The government may also choose to give industries a sub-
sidy (a payment or tax break) and thus increase aggregate supply. For example, the government may choose to subsidize
firms that use electricity as opposed to gasoline because electricity burns cleaner and is better for the environment. Further
regulation means less output for firms because it is costly for them to comply with government requirements.

Changes in the environment also affect aggregate supply. For instance, natural disasters and unusual seasonal conditions
can contribute to changes in aggregate supply. If an orange grower experiences an unusually cold winter, its supply of
oranges will fall. If this happens to enough orange growers nationwide, aggregate supply could be affected.

Figure 4-5 shows an increase and a decrease in aggregate supply. The price level is located on the vertical axis; output
or GDP is located on the horizontal axis.

Figure 4-5

A change in one or more of the determinants of aggregate supply shifts the aggregate supply curve. In Figure 4-5, AS1
to AS2 represents a decrease in aggregate supply. AS1 to AS3 represents an increase in aggregate demand.

Review of Concepts

■ AS curve has 3 ranges

■ Alteration of production costs change aggregate supply

■ An increase in aggregate supply is a shift to the right, while a decrease in aggregate supply is a shift to the left.

Mini-Review

1. Why does the aggregate demand curve slope downward?
   A. Production costs fall as GDP increases.
   B. As price level rises, so does aggregate demand.
   C. Real-balance, interest-rate, and foreign-purchases effects increase the amount of real GDP demanded.
   D. The Substitution effect provides alternatives
   E. None of the above.

Price

Level

Output/GDP

Increase

In AS

Decrease

In AS

AS^2 AS^1 AS^3

Aggregate Expenditures, Aggregate Supply and Aggregate Demand Models