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GOVERNMENT CONSUMPTION EXPENDITURES AND GROSS INVESTMENT: The official item in the National Income and Product Accounts maintained by the Bureau of Economic Analysis measuring government purchases undertaken by the government sector. Government consumption expenditures and gross investment averages between 15-20% of gross domestic product. This percentage tends to be ebb and flow a little with the political winds.

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WAGES, AGGREGATE SUPPLY DETERMINANT:

One of several specific aggregate supply determinants assumed constant when the short-run aggregate supply curve is constructed, and that shifts the short-run aggregate supply curve when it changes. An increase in the wages causes a decrease (leftward shift) of the short-run aggregate supply curve. A decrease in the wages causes an increase (rightward shift) of the short-run aggregate supply curve. Other notable aggregate supply determinants include the technology, energy prices, and the capital stock. Wages are an example of a resource price aggregate supply determinant.
Wages paid to labor constitute about 60 percent of the total cost of producing the economy's aggregate supply of real production. Wages often change due to market conditions for individual occupations and industries, meaning some wages rise while others fall. However, the macroeconomic analysis of aggregate supply is concerned with economy-wide wage changes that happen from time to time.

A couple of reasons for economy-wide wage movements include: (1) labor market shortages or surpluses associated with business-cycle instability or (2) changes in workers' expectations of future inflation. Higher wages increase the overall cost production. Lower wages decrease the overall cost production. That means changes in wages affect the ability of the business sector to produce and supply real production in the short run.

Shifting the SRAS Curve
Shifting the SRAS Curve

Consider a typical, run-of-the-mill short-run aggregate supply curve such as the one displayed here. Like all short-run aggregate supply curves, this one is constructed based on several ceteris paribus aggregate supply determinants, such as wages. The key question is: What happens to the short-run aggregate supply curve if wages change? Make note that wages are not a determinant of long-run aggregate supply. As such this analysis focuses only on the SRAS curve.

Lower Wages

Suppose, for example, that the economy has been in a serious business-cycle contraction for several years. Labor market surpluses have kept unemployment high. While wage rigidity might prevent wages from declining... temporarily... eventually they do decline to eliminate the unemployment.

This decline in wages reduces production cost and leads to an increase in short-run aggregate supply, causing the SRAS curve to shift rightward. Note that the decline in wages and production cost make it possible to supply the same quantity of real production at a lower price level or to supply a larger quantity of real production at the same price level, both of which represent an increase in short-run aggregate supply.

To see how lower wages affect the short-run aggregate supply curve, click the [Lower Wages] button. The lower wages triggers an increase in short-run aggregate supply and a rightward shift of the short-run aggregate supply curve.

Higher Wages

Alternatively, the economy could be in the middle of an extended expansion that is pushing the limits of production capabilities. Labor market shortages have kept unemployment low. While misperceptions about real wages, access to frictional and structural unemployment, and even a touch of wage rigidity might keep wages from rising... temporarily... eventually they rise in response to any shortage.

This increase in wages reduces production cost and leads to a decrease in short-run aggregate supply, causing the SRAS curve to shift leftward. Note again that the increase in wages and production cost mean the same quantity of real production is supplied at a higher price level or a smaller quantity of real production is supplied at the same price level, both of which are part of a decrease in short-run aggregate supply.

To see how higher wages affect the short-run aggregate supply curve, click the [Higher Wages] button. The higher wages triggers a decrease in short-run aggregate supply and a leftward shift of the short-run aggregate supply curve.

What Does It Mean?

The importance of wages as an aggregate supply determinant, particularly for short-run aggregate supply, is critical in the study of macroeconomics, and especially automatic adjustments to instability. Disruptions of the aggregate market from long-run equilibrium, usually resulting from changes in aggregate demand, create short-run labor market imbalances. These imbalances, both shortages and surpluses, persist temporarily because wages do not adjust.

However, wages adjust.. eventually. This eventuality is what moves the economy from the short run to the long run. Moreover, the adjustment of wages that eliminates labor market imbalances, also triggers changes in production cost that shift in the short-run aggregate supply curve through the resource price aggregate supply determinant. Best of all, this SRAS-wage-adjustment mechanism works automatically, returning the aggregate market to long-run equilibrium.

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Recommended Citation:

WAGES, AGGREGATE SUPPLY DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 20, 2018].


Check Out These Related Terms...

     | aggregate supply determinants | aggregate supply shifts | change in aggregate supply | change in real production | slope, aggregate supply curve | resource quantity, aggregate supply determinant | resource quality, aggregate supply determinant | resource price, aggregate supply determinant | energy prices, aggregate supply determinant | technology, aggregate supply determinant | capital stock, aggregate supply determinant | aggregate demand determinants |


Or For A Little Background...

     | aggregate supply | short-run aggregate supply | long-run aggregate supply | short-run aggregate supply curve | long-run aggregate supply curve | gross domestic product | price level | real production | GDP price deflator | real gross domestic product | production cost |


And For Further Study...

     | AS-AD analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | flexible prices | inflexible prices | short-run aggregate supply and market supply | aggregate market shocks | self correction, aggregate market |


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