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## Hot answers tagged aggregate-production

13

A price-taking firm takes prices as given, but that does not mean that the firm cannot influence prices; it just means that the firm ignores its own impact on prices. Now the question is how sensible it is to assume that firms take prices as given. The usual view is that it is a reasonable assumption when the impact of a firm on prices is small enough ...

7

This does sound a lot like the “contradiction” that Keen tries to derive. The key to resolving it is to remember that firms are small relative to the market, so $$\frac{\mathrm dQ}{\mathrm dq_i} = 0.$$ One way to justify the above restriction is to assume there is a continuum of firms, so that each firm has zero measure, and $$Q = \int_{j \in I} q_j \, \... 5 You’re looking for gross output; GDP is final output. Per the BEA: Economy-wide, real gross output—principally a measure of an industry's sales or receipts, which includes sales to final users in the economy (GDP) and sales to other industries (intermediate inputs) For calculation purposes, it’s generally assumed that a firm purchasing a good (for ... 4 Consider an economy with two commodities. Production is trivial, Y=\{0\}, there is a single consumer with endowment (1,1) whose preferences are represented by the utility function given by u(x_1,x_2)=\max\{x_1,x_2\}+1/2\cdot x_1 +1/2\cdot x_2. These preferences are continuous, strictly monotone, but not convex. You can verify that there is no ... 4 Doing this more abstractly, let Y_j\subseteq\mathbb{R}^n be a production set for j=1,\ldots,m and let$$Y=Y_1+Y_2+\cdots+Y_N=\{y_1+y_2+\cdots+y_n|y_j\in Y_j, j=1,\ldots,m\}$$be the aggregate production set. The standard result on when the aggregate production set is closed is the following: Theorem: Let Y_j be closed and convex sets containing 0 for ... 3 For a fully overview on the conditions for the sum of closed sets to be closed, see this note of Kim Border Recession cones I'll be working with subsets of \mathbb{R}^n. Let's start with some definitions. Def: A set C is convex if for x, y \in C and \alpha \in [0,1], \alpha x + (1-\alpha) y \in C. Def: A set K is a cone if for x \in K and \... 3 Aggregate supply is a relationship of price level and output. It is a function, or a curve, or a table. It is not a single value. If we know a particular price level, then we can determine the level of output that would correspond with that. The GDP for 2006 is determined by plugging in the price level of 2006 to the AS curve for 2006, and seeing what output ... 2 Consider two firms with production functions A_1 F(k,l) and A_2 F(k,l). Both have the same curvature (and are CRS), but one is more productive. Here we can solve the social planner's problem (why?) instead of looking at a competitive equilibrium. He will want to equalize marginal returns across the firms. As one is more efficient, it will get more inputs.... 2 Because higher wages do not necessarily mean that national income increased. From macroeconomic perspective national income is output. Higher wages in these simple models do not necessarily translate into higher output. For example if these higher wages come from company’s profit then on one hand one (worker) household income increases but another (... 2 In economics we measure living standards by the amounts of goods and services people can consume. Increasing labor productivity allows us to produce more goods and services and thus also consume more goods and services, hence it improves the living standards. For example consider classic Cobb-Douglas production function:$$ Y = K^{\alpha} (AL)^{1-\alpha}$$... 2 Actually the Cambridge controversy sort of affected macroeconomic modeling. As explained in the article that is also linked in one of the comments, the aggregate production function, real business cycle, neoclassical general equilibrium models, and endogenous growth theories can be thought of as an retort to some of the criticism levied by the English side ... 2 At the outset, discovery does not equate availability. Huge amounts of platinum (or the material at issue) might be discovered, but that does not necessarily mean that its extraction is feasible or practicable with the currently available techniques. See here and here. Assuming that the discovered material is economically available, then supply would ... 1 For question 1, I think that investment has a demand-side effect on the economy. I think it isn't a supply-side effect because it isn't stated that the investors are responding to a supply-side shock. So I'm saying that AD shifts right. With shifts in the curves, there will be a change in equilibrium. For example, the process you described of both curves ... 1 It does, in the long-run. It's partly a question of response time, and as you outline, AD has intervening steps that AS does not (wages in most markets are sticky and take time to adjust, while sticker prices in many markets can change in a day or less). In general, thinking carefully about response times will help alleviate some of the ambiguity in the ... 1 The existence of aggregate demand does not mean that aggregate demand is fulfilled. For instance if the aggregate planned demand is 100 billion dollars and due to crisis or war output is very low at just 10 billion dollars. Does the national income equal 100 billion dollars? 1 Expressing consumption as$$C = a + f(Y)$$where Y is income, there is nothing in the theory that forbids$$a > f(Y)$$even though the theoretical anticipation and the empirical regularity (i.e. for most people) is that a < f(Y). 1 The role of 45 degree line while showing a consumption function is that the 45 degree line translates the values on x-axis to equal values on y-axis. The consumption function is drawn on an income and aggregate expenditure plane. Hence the 45 degree line shows consumption + savings which is aggregate output or aggregate supply or income. The other way to ... 1 Explaining the shape of the horizontal range In the very short run, the AS curve is perfectly price-elastic (i.e. on the diagram, it is a horizontal line). It is also referred to as the Keynesian range. In this time period, firms respond to a rise in demand for their product without considering the effects of the rising demand, such as higher prices. This ... 1 In shifting the\ AD_1 \rightarrow AD curves to achieve long run equilibrium, Real GDP will have to increase by 200 billion. Refer to the diagram below, (in purple). \ MPC = 0.75 \rightarrow MPS = 0.25 In this 3 sector closed-economy model, the multiplier can be calculated using :$$\ K = \frac{1}{MPS+MPT} $$Assuming MPT (Marginal Propensity to Tax) ... 1 Total investment in terms of how much capital is augmented, is always I = I_{b} + I_{h}. (I_{b}^K + I_{h}^K)^{\frac{1}{K}} is equal to the amount of the intermediate good Y that we need to allocate for investment. And given the formulation and when K>1 we see that we economize on the amount of the intermediate good Y,$$Y_I = (I_{b}^K + I_{h}...

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Short answer: Yes, the SRAS curve will shift after the LRAS shifts to return the short-run equilibrium (SRAS/AD) back in line with the long-run equilibrium (LRAS/AD). The reason the SRAS curve doesn't shift immediately with LRAS is that there are so-called "frictions" or "nominal rigidities" such as contracts and information gaps that prevent firms from ...

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The SRAS also shifts. SRAS is normally used in models where the supply side does not adjust immediately to the new conditions in the market, i.e. models with nominal rigidities. Examples are: sticky wages, sticky prices. Other instances where adjustments in prices or nominal money supply are not immediate and in which money has a real effect are the Lucas '...

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