Long run be Short run

Long run vs Short run 

Long run- period of time where input prices are completely flexible and adjust to changes in the price level.

Real GDP is independent of PL

Short run- Period of time where input prices are sticky and do not adjust to changes in price level.

Real GDP supplied is directly related to the PL

LRAS- marks the level of full employment in the economy( analogous to PPC)

LRAS is vertical at the economy level of full employment. Do not change firm profit which won't change firms Level of output

SRAS- Because input prices are sticky in the short run, the SRAS is upward sloping.

Increase in SRAS= ->

Decrease in SRAS = <-

Key= per unit cost of production

Per unit production cost= total input cost / total out put

Determinant of short run-

Input prices 

Productivity 

Legal institutional environment 

Input prices

Domestic-

Wages (75% of all business cost)

Cost of capital 

Raw material

Foreign-

Strong $= lower foreign prices

Weak $= higher foreign prices 

Market power- 

Monopolies and cartels. 

Increase in resources prices= SRAS<-

Decrease in resource price= SRAS->

Productivity

Productivity= total output/input

More= lower unit price=->

Less= more = <-

Legal institutional environment

Taxes and subsides- 

Taxes= <-

Subsidies = ->

Government regulation 

Government regulation= <-

Deregulation reduces = ->