1.3 Aggregate Supply Flashcards
1
Q
What is the same as total output of an economy?
A
aggregate supply
2
Q
What is the definition of aggregate supply?
A
- Aggregate Supply is the total output of goods and services that firms in an economy are willing and able to supply at a given price level in a given period of time
3
Q
What is SRAS?
A
- Short Run Aggregate Supply
- Shows the total output domestic producers are willing and able to supply in a time period when price of factor inputs are fixed
- positive relationship between price level and GDP
- opposite of AD curve
4
Q
Why does the SRAS curve slope upwards?
A
- A fall in the price level means the firms profit margin decreases
- they respond to this by reducing production which will cut costs
- This is a contraction in aggregate supply
- vice versa for extension of supply
5
Q
What is a shift of the SRAS curve?
A
- A change in any factor affecting AS except price level will cause SRAS to shift
- Main causes of SRAS shifts are changes in the cost of production
6
Q
What are 4 examples of what can cause the SRAS curve to shift?
A
- Changes in unit labour costs - rise in unit labour costs means shift to the left of the SRAS curve
- Changes to costs of raw materials and components - especially if imported as then exchange rate fluctuation can have an effect - higher costs means a leftwards shift
- Changes in other production costs - e.g rental costs, cost of finance, subsidies and taxes ON PRODUCTION
- Short Run shocks to production - temporary non economic factors such as a tsunami
7
Q
what type of taxes affect the SRAS curve shifting?
A
- taxes and subidies on production NOT CORP TAX
8
Q
What is unit labour costs?
A
- Wage costs adjusted for productivity - e.g a worker can make 5 tshirts per £10/per hour (hourly wage is £10)
9
Q
What does the LRAS curve show?
A
- There is a limit to the quantity of factors production
- LRAS shows the potential or full capacity level of output in the economy with all resources fully utilised
10
Q
What is the neoclassical LRAS?
A
- neoclassical LRAS is a vertical line which shows the long term production output of the economy
- can be shifted and the position is determined by Q2CELL/Productive effiiciency and Institutional Framework and the mobility of factors
11
Q
What can cause the LRAS curve to shift
A
- q2CELL e.g investment (all 3)
- Productive efficiency increases - e.g infrastructure development
- Government Policy towards businesses - how hard is it to start a business?
- Policy encouraging more competition amongst firms
- Increased geographical and occupational mobility
12
Q
What is the difference between the new keynsian LRAS and the neoclassical LRAS?
A
- Neoclassical economists think the markets correct themsleves rapidly, and therefore all markets are in equilibirum in the long run and therefore in the long run the economy operates at full capacity on the LRAS vertical line/production possibility frontier
- Keynsians however believe markets take a n time to clear and especially in labour markets wages are sticky dwonwards (workers are not willing to accept lower wages even in unemployment) and this unemployment can persist for many years after a supply or demand shock and does not readily return back
13
Q
What is section 1 of the NK LRAS curve?
A
- If output is low enough there is enough spare production capacity that ouput can be increased without any effect on price level
- more factors of production that have been unused can be used without driving factor prices and average price level up
- flat section of new Keynsian LRAS
14
Q
What is section 2 of the NK LRAS curve?
A
- As output increases firms start competing for scarcer factor inputs which puts a pressure on factor prices and causes average price level to increase
15
Q
What is section 3 of the NK LRAS curve?
A
- When FOP are fully utilised it is no longer possible to raise real output and the economy reaches full output level of employment
- Any pressure on wages or other factor prices will only cause increases in price level with no real GDP incrases
