EC140 Lecture Notes - Lecture 10: Potential Output, Output Gap, Longrun
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EC140 Full Course Notes
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Ec 140- lecture 10: chapter 24; from the short run to the long run. Real gdp determined by intersection of supply and demand. Technology and factor supplies are assumed constant. Total output if all productive resources were fully employed- independent of price level. Monday february 4th 2018: fully employed resources does not mean unemployment is zero. Changes in potential output are long-run, not short-run. If real gdp < potential output: recessionary gap. If real gdp > potential output: inflationary gap. Potential gdp as an anchor - economy returns to potential gdp after a shock. This causes the as curve to shift left. Labour shortages emerge- firms offer increased wages to attract/ keep workers. Higher wages lead to higher costs for all inputs. This causes the as curve to shift right. Shifts end when real gdp equals potential output. Labour surpluses- firms offer workers reduced wages. Lower wages lead to lower costs for other inputs.
