Aggregate Supply Shift

key terms

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capital

GDP

labor

What causes the aggregate supply curve to shift?

Examples of changes to the long-run aggregate supply curve:

Pollution makes it impossible to cultivate large tracts of land or use waterways. 

Technology advancements, such as the computer, make production cheaper.

A restriction on immigration reduces the number of workers available, and thus increases the cost of production (wages will be higher).

The reduction in the required minimum wage allows firms to hire more workers at less cost.

Aggregate Supply Shift Figure 1
Aggregate Supply Shift Figure 2

Examples of changes to the short-run aggregate supply curve:

Oil producers restrict the amount of oil they supply, causing oil prices to rise. This increases the costs of production of almost all goods.

The government reduces taxes on businesses, making it cheaper for them to produce their goods.

A drought in Australia and a flood in the United States ruin this year’s rice and corn harvest.

Favorable weather leads to increased crop production across the world.

Aggregate Supply Shift Figure 3
Aggregate Supply Shift Figure 4

There is very little difference in what shifts the long-run and short-run aggregate supply curve.  If a change is only temporary, it may not have time to change the long-run aggregate supply curve.  Look at the example of a flood. If it floods one year but the next year farm production is back to normal, the flood may only cause a shift the short-run aggregate supply curve. In addition, some changes may affect the short-run aggregate supply curve quicker, while the long-run aggregate supply curve takes time to catch-up to the changes. 

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