Narrator: We've talked a lot about
aggregate demand over the last few videos,
so in this video, I thought I would talk
a little bit about aggregate supply.
In particular, we're going to think about
aggregate supply in the long-run.
In economics, whether it's in micro or macro
economics, when we think about long-run,
we're thinking about enough time for a lot of
fixed costs and a lot of fixed contracts to expire.
In the short-term, you might be stuck into some
labor contract, or stuck into your using some factory
that you've already paid money for, so it was a fixed
cost, but over the long-run you'll have a chance that
factory will wear down and you'll have a chance
to decide whether you want another factory or
the price of the factory might change;
or in the long-run, you'll have a chance
contracts will expire, and you'll have a chance
to renegotiate those contracts at a new price.
That's what we really mean
when we talk about the long-run.
I'm going to plot aggregate supply on the same axis
as we plotted aggregate demand, and we're going
to focus on the long-run now, and then we're going
to think about what actually might happen in the
short-run while we are in fixed-price contracts,
or we already have spent money on something,
or we have already, in some ways, there are sticky
things that can't adjust as quickly.
But, we'll first focus on the long-run.
On this axis, I'm just going to plot price, and
remember, we're thinking in macro-economic terms.
This is some measure of the prices
of the goods and services in our economy.
This axis right over here,
the horizontal axis is going to be real GDP.
Once again, this is just a model, you should take
everything in economics with a huge grain of salt.
These are over-simplifications of a highly,
highly complex thing, the economy.
Millions and millions of actors doing
complex things, human beings, each of them and
their brain have billions and billions and billions
of neurons, doing all sorts of unpredictable things.
But economists like to make
really simplifying, super-simplifying assumptions,
so that we can deal with it in a attractable way,
and in a even dealing in a mathematical way.
The assumtion that economists often make
when we think about aggregate supply
and aggregate demand is, in the long-run,
real GDP actually does not depend on prices
in the long-run; so, what you have is,
regardless of what the price is, you're going
to have the same real GDP.
You can view this as a natural level
of productivity for the economy.
This is some level right over here.
It's important to realize this is just
a snap shot in time, and this is all else things equal,
so we're not assuming that we're having changes in
productivity overtime; this is just a snap shot if
we did have any of those things that change.
For example, if the population increased, then that
would cause this level to shift to the right, then
we would have a higher natural level of productivity.
If, for whatever reason, we were able to create tools
so that it was easier to find people jobs, there's
always a natural rate of unemployment.
There's frictions, people have to look for jobs,
some people have to retrain to get their skills,
but maybe we improve that in some way so that
there's some website where people can find jobs
easier, or easier ways to train for jobs,
and the natural level of unemployment goes down,
more people can produce, that would also
shift this curve to the right.
You could have a reality where there's
technological improvements that would also,
and then all of a sudden, on an average,
people would become more productive;
that could shift things to the right.
You could have discovery of natural resources,
new land that is super fertile, and everything else;
that could also shift things to the right.
You could have a war, and maybe your
factories get bombed, or bad things happen in a war,
especially if the war is on your soil,
and that could actually shift things to the left.
So, it's important to realize that this is just taking
a snap shot in time, and a lot of these
other things that we think about would just
shift it in 1 direction or another.
I'm going to leave you there, and this is a kind of
it might not seem intuitive at first, because
you're saying, "Wait, look, if prices were to change
dramatically, if all of a sudden everything in the
economy got twice as expensive, that would have
some impact on peoples' minds and that they would
behave differently and all the rest, and that might
affect how much they can produce."
We did think a little about that when we thought
about aggregate demand, but when we think
about aggregate supply, we're just thinking
about their capability to produce.
We're saying all else equal.
We're saying that peoples' mind-shifts aren't
changing, their willingness to work isn't changing,
nothing else is changing, technology isn't changing.
Given that, price really is just a numeric thing.
If you just looked at the resources
and the productive capability of a country,
the factors of production, the people and all the rest,
regardless of what the prices are, they in theory,
should be able to produce the same level
of goods and services.