Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Neo-Classical Aggregate Supply Model The neo-classical aggregate supply model sees that aggregate supply is determined by long-run factors, such as the availability of factors of production and the ability of firms to adjust their output. In this model, aggregate supply is inelastic in the short run, meaning that changes in aggregate demand will not result in large changes in aggregate production. The neo-classical model of aggregate supply views that relative prices and wages can change in the short run in response to changes in demand and supply in the market. When aggregate demand increases, prices will increase and cause production costs to increase, thereby reducing company profits. In response to a decrease in profits, firms will reduce their production and cause a decrease in aggregate output. Conversely, if aggregate demand decreases, prices will decrease and production costs will decrease, so firms will increase production and aggregate output will increase. The neo-classical model of aggregate supply assumes that markets are perfect and that there is no unemployment. Therefore, aggregate production is always at full level and there is no imbalance in the long term. This model also views that factors of production can move freely between industries, so that the labor market and capital market function properly. However, some critics argue that the neo-classical model of aggregate supply ignores the fact that relative prices and wages are often difficult to change in the short run, especially during economic recessions. In addition, this model also ignores the importance of short-run factors, such as technology and government regulations, in determining aggregate supply. The neo-classical aggregate supply model views aggregate supply as being influenced by factors of production, such as capital, labor, and technology. This model also emphasizes price and wage flexibility, so that aggregate supply will always return to its natural level in the long run. According to the neo-classical aggregate supply model, a higher price level will increase firm profits and encourage increased production in the short run. However, in the long run, a higher price level will increase production costs, so that the level of aggregate supply will return to its natural level. The neo-classical aggregate supply model also emphasizes that long-term increases in production can only be achieved through increases in factors of production, such as increases in capital and labor skills, as well as improvements in technology. In the long run, the production rate will always return to the natural level determined by the factors of production. The neo-classical aggregate supply model emphasizes the influence of factors of production and the flexibility of prices and wages in determining short-run and long-run aggregate supply. This model became popular in the 1970s and is still the approach used in many macroeconomic analyzes today. However, the neo-classical aggregate supply model also has several drawbacks. One is that this model does not take into account short-run imbalances in the economy, such as high unemployment and idle production capacity. This model also does not take into account uncertainties in the market, such as changes in the global economy, natural disasters or unexpected government policies. In addition, the neo-classical aggregate supply model also does not consider externalities and social costs that are not reflected in market prices. For example, the excessive use of fossil fuels can cause air pollution and climate change which are not reflected in market prices, so this model cannot consider the negative impacts of economic activities on the environment and society. Nonetheless, the neo-classical aggregate supply model is still an important approach in macroeconomic analysis, especially in estimating long-run aggregate supply and long-run changes in factors of production and technology. However, this model needs to be combined with other approaches that consider other factors that affect aggregate supply, such as changes in the business climate. Overall, the neo-classical aggregate supply model provides a more realistic view of how the economy performs in the long run and provides a better understanding of how factors such as investment and technology affect economic growth in the long run. However, for understanding the dynamics of the economy in the short run, the Keynesian aggregate supply model may be more suitable because it considers factors such as unemployment, uncertainty, and fiscal and monetary policies. Due to the limitations and drawbacks of each model, economists often use a mixed approach or an approach that combines multiple models to understand complex economic dynamics. In practice, the use of these models is adjusted to the objectives of the research and analysis carried out.