Sunday  November 27, 2022
 AmosWEB means Economics with a Touch of Whimsy!
 RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is \$50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect \$50,000 (\$50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

CHANGE IN AGGREGATE SUPPLY:

A shift of the short-run or long-run aggregate supply curve caused by a change in one of the aggregate supply determinants. In essence, a change in aggregate supply is caused by any factor affecting supply EXCEPT the price level. This is one of two changes related to aggregate supply. The other is a change in real production. A change in aggregate supply is comparable to a change in market supply.
A change in aggregate supply is a shift in one of the aggregate supply curves--short run or long run. Because aggregate supply includes ALL price level-real production combinations, a change in aggregate supply is a change in ALL price level-real production combinations, meaning that each price level is matched up with a different real production after the change. This is illustrated as a shift of one of the aggregate supply curves. This change in aggregate supply is caused by a change in any of the aggregate supply determinants.

In contrast, a change in real production is a change from one price level-real production combination on a given aggregate supply curve to another point on the same curve. This is illustrated as a movement along a given aggregate supply curve.

Change in SR Aggregate Supply

Change in LR Aggregate Supply

The exhibit to the right displays two curves--the short-run aggregate supply curve (SRAS) in the top panel and the long-run aggregate supply curve (LRAS) in the bottom panel. A change in aggregate supply is illustrated by a shift in either curve. To illustrate how this transpires, click the [Determinant and SR] button in the top panel or the [Determinant and LR] button in the bottom panel. Upon clicking either button, the corresponding aggregate supply curve shifts to the right, illustrating an increase in aggregate supply, and more generally, a change in aggregate supply.

The contrasting change is a change in real production--the movement along an aggregate supply curve. To illustrate this change, click the [Price Level and SR] button in the top panel or [Price Level and LR] button in the bottom panel. The click of either button illustrates a movement along the corresponding curve. While the phrase "change in real production" is used for both curves to indicate a movement along the curve, because real production is constant in the long run, real production actually '" changes" only by moving along the short-run aggregate supply curve.

Why is the difference a change in aggregate supply and a change in real production so important? The answer is as simple as cause and effect. The aggregate supply curves are used (together with the aggregate demand curve) to explain and analyze macroeconomic events, especially business-cycle instability. The sequence of events follows a particular pattern.

• First, a determinant (of either aggregate demand or aggregate supply) changes.

• Second, this determinant change causes one of the aggregate supply curves or the aggregate demand curve to shift. An aggregate supply determinant change causes a shift in one of the aggregate supply curves and an aggregate demand determinant change causes a shift of the aggregate demand curve.

• Third, the change in aggregate supply or aggregate demand causes an imbalance in the aggregate market (an economy-wide shortage or surplus). The aggregate market is in a temporary state of disequilibrium.

• Fourth, the economy-wide shortage or surplus causes the price level to change.

• Fifth, the change in the price level causes a change in aggregate expenditures and possibly real production (in the short run).

• Sixth, the changes in aggregate expenditures and/or real production eliminate the shortage or surplus and restore equilibrium.
The key conclusion is that aggregate supply (and aggregate demand) determinants, which induce changes in aggregate supply (and aggregate demand), are the source of instability in the aggregate market. The change in the price level, which induces a change in real production (and aggregate expenditures) is the means of eliminating the instability and restoring equilibrium.

 <= CHANGE IN AGGREGATE EXPENDITURES CHANGE IN DEMAND =>

Recommended Citation:

CHANGE IN AGGREGATE SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: November 27, 2022].

Check Out These Related Terms...

Or For A Little Background...

And For Further Study...
Search Again?

 WHITE GULLIBON[What's This?] Today, you are likely to spend a great deal of time going from convenience store to convenience store wanting to buy either high-gloss photo paper that works with your printer or a desktop calendar with all federal and state holidays highlighted. Be on the lookout for jovial bank tellers.Your Complete Scope
 The portrait on the quarter is a more accurate likeness of George Washington than that on the dollar bill.
 "It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things. "-- Elinor Smith, aviator
 ABEAssociation of Business Executives
 Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

| | | | | | | | | | |
| | | |

Thanks for visiting AmosWEB