1.3 Aggregate Supply Flashcards
What is aggregate supply ?
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
What is the difference between short-run and long-run
We usually think of the short run as the period of time when prices of factor inputs stay fixed (e.g wages are fixed)
What does the short-run aggregate supply curve look like ?
Why is the SRAS curve upward sloping ?
A fall in the price level will lead to a decrease in firms profits, they will seek to reduce costs by reducing production this is a contraction in SRAS
What can cause the SRAS to shift ?
1) changes in unit labour costs
2) changes to costs of raw materials and components
3) changes in other production costs
4) short-run shocks to production
Why does changes in unit labour costs shift SRAS ?
Unit labour costs are wage costs, adjusted for productivity. A rise in unit labour costs might be due to higher wages or a fall labour productivity, increasing costs of production, leading to a shift to the left of the SRAS curve
Why does changes to costs of raw materials and components shift SRAS** ?
An increase in the costs of inputs will increase cost of production for firms leading to a shift to the left in the SRAS curve.
What are the possible causes of an increase in SRAS ?
What is the neoclassical LRAS and what does it depend on ?
What causes the LRAS curve to shift ?
1) changes in the size of the workforce
2) technological progress
3) improvements in education and skills
4) Government policy towards businesses
5) Increased geographical and occupational mobility
6) policies which encourage more competition amongst firms
What does the new Keynesian LRAS curve look like ?
What does section 1 of the LRAS curve show ?
If output is low, the economy will lots of spare capacity, factors of production are not being utilised, any increase in output will lead to more factors employed, this leads to an increase in real GDP with no increase in the price level.
What does section 2 of the LRAS curve show ?
As output increase, firms start competing for increasingly scarce factor inputs. This puts an upward pressure on factor prices and begins to force up the average price level in the economy.
What does section 3 of the LRAS curve show ?
When factors of production are fully utilised, it is no longer possible to increase real output, the economy reaches full employment level of output which is independent of the price level.
Any increase in AD will lead to an increase in the price level with no increase in real GDP