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OKUN'S LAW: A relationship that says that the gap between actual and full employment output level of gross domestic product widens by 3.0% for each percentage point increase in the unemployment rate. When Arthur Okun discovered this empirical relationship he was on President Kennedy's Council of Economic Advisers (CEA). Okun cautioned that the relationship was valid only within unemployment rates of 3% and 7.5%.

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CLASSICAL AGGREGATE SUPPLY CURVE:

An aggregate supply curve--a graphical representation of the relation between real production and the price level--that reflects the basic principles of classical economics. The classical aggregate supply curve is vertical at the full-employment level of real production indicating that the quantity of aggregate production is independent of the price level. An alternative is the Keynesian aggregate supply curve.
An aggregate supply curve is a graphical representation of the relation between real production and the price level. Classical economics implies that the full-employment level of real production is maintained regardless of the price level, which creates a vertical, or perfectly elastic, aggregate supply curve. This relation results due to flexible prices, which ensure that resources markets maintain equilibrium balance at full employment. Should the price level rise or fall, wages and resource prices adjust to ensure that quantity demanded equals quantity supplied in resource markets.

Classical AS Curve
Classical AS Curve
The exhibit to the right illustrates a classical aggregate supply (AS) curve. The obvious characteristic is that the curve is actually a vertical line. The line is vertical at the full-employment level of real production. Should the price level rise or fall, the economy moves up and down along the curve and real production remains unchanged.

The full-employment level of real production corresponds to the natural unemployment rate, also termed the non-accelerating inflation unemployment rate. The measured unemployment rate is not necessarily zero. This rate includes both frictional unemployment and structural unemployment and results if the quantity of labor demanded is equal to the quantity of labor supplied.

The classical aggregate supply curve looks a great deal like the long-run aggregate supply curve. Both are vertical at the full-employment level of real production. Both indicate that real production is unaffected by changes in the price level. The reason for the similarity is that the long-run aggregate supply curve is the modern embodiment of the principles of classical economics.

For the classical aggregate supply curve, changes in the price level results in changes in wages and resource prices that ensure equality between quantity demanded equals quantity supplied in resource markets. For the long-run aggregate supply curve, changes in the price level results in changes in wages and resource prices that ensure equality between quantity demanded equals quantity supplied in resource markets--in the long run.

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CLASSICAL AGGREGATE SUPPLY CURVE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2015. [Accessed: September 4, 2015].


Check Out These Related Terms...

     | classical economics | assumptions, classical economics | Say's law | Keynesian economics | Keynesian aggregate supply curve | flexible prices |


Or For A Little Background...

     | macroeconomics | full employment | efficiency | laissez faire | free enterprise | flexible prices | long-run aggregate supply curve | aggregate supply | aggregate market analysis | natural unemployment | frictional unemployment | structural unemployment | price level | real gross domestic product | competitive market |


And For Further Study...

     | aggregate market shocks | business cycles | aggregate demand increase, long-run aggregate market | aggregate demand decrease, long-run aggregate market | disequilibrium, long-run aggregate market |


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