2:2:2 - Aggregate Supply - Aggregate Demand And Supply Flashcards
What is meant by the term aggregate supply?
Is the amount that firms are willing to produce at various price levels.
What is aggregate supply largely influenced by?
Influenced by productivity
What are the factors that influence productivity?
– Cost of production
– level of investment
– availability and efficiency of factors of production
– supply-side policies
What causes a movement along the aggregate supply curve?
When the average price level changes
How will a change in the cost of production faced by all firms affect the aggregate supply curve?
The whole aggregate supply curve will shift
What might cause costs of production faced by all firms to change and subsequently shift the whole aggregate supply curve?
– Changing the cost of raw materials – wages – exchange rates – indirect tax rates (short run) - changes in the productive potential
What is meant by the term bottleneck?
Is when limited capacity reduces the capacity of the whole chain.
Shifts in short run AS are caused by?
Change in the costs of production
What remains unchanged if there is a movement in short run AS?
Productive capacity
What is mean by the term short run Aggregate Supply?
Means that there is at least one fixed factors and firms cannot change their overall output unless the factors of production are variable
What does Long Run Aggregate Supply show?
Shows the productive potential of firms when all factors are variable
For Classical Economists the long run AS is a [……….] line on the Aggregate Demand / Aggregate Supply diagram.
Vertical
What does the Vertical Long Run Aggregate Supply line show?
Is the productive potential of the economy.
What must be true for the Long Run Aggregate Supply line to be Vertical?
All resources must be used efficiently
What is the difference between short run Aggregate Supply and Long Run Aggregate Supply?
- Short Run Aggregate Supply means there is at least one fixed factor and firms cannot change their overall output unless the factors of production are variable
- Long Run Aggregate Supply shows the productive potential potential of firms when all factors are variable
What does Long Run Aggregate Supply show?
Shows the productive potential in an economy when all factors are variable
Difference between short run impact and long run impact?
- Short Run - is a change in production costs
- Long Run - Is a change in the level of output
In the long run, the ability of an economy to produce goods and services to meet demand is based on the….
- State of production technology
- Country’s infrastructure
- Quantity and Quality is factors of production (such as labour)
What causes shifts in the Long and Short Run Aggregate Supply?
- Short Run ‘Supply Side Shocks’ (e.g. changes in oil prices and exchange rates)
- Changes in the quality and quantity of factors of production
- Falls in oil prices can have a short run and long run effect
Shifts in Aggregate Supply occur when….
Factors change that affect most firms
How does a Short Run changes affect firms?
- Affect costs of production
- NOT the amount they are willing and able to produce
What are Short Run shifts also called?
External Shocks
What affect does a Short Run shift (External shocks) have on the AS curve?
Cause AS to shift up or down rather than right or left (which indicates a change in capacity)
What does a upward/downward shift in the AS curve show?
Indicates a change in capacity
What factors could cause a change in capacity (AS to shift up or down)?
- Cost of workers (labour market)
- Way in which firms compete (product market)
Factors that shift short run AS?
- Changes in the cost of raw materials (In the UK most materials are imported, if global competition increases, UK costs fall. cost of these imports depends on demand pressures from other parts of the world)
- Changes in exchange rates (Strong Pound imports Cheap)
- Changes in Tax Rates (If there is an increase in taxes costs for all UK firms increase, firms may pass these cost increases into the consumer, increase in taxes decreases the AS curve, push it upwards)
What is the Classical view on long run Aggregate Supply?
It is a vertical line (economy is operating at full capacity and there is no unemployed resources)
What is the Keynesian view on the AS curve?
- Equilibrium can be achieved even below full employment
- According to this the AS curve has a backward bending L shape
What are the three distinct section of the backward bending Aggregate Supply Curve?
- Spare Capacity
- Bottlenecks
- Full Capacity
Why can an economy increase output without any cost pressures, when at the point of spare capacity on the backward bending AS curve?
Because the are unused resources such as factories not working at full capacity or unemployed labour
What would happen to AD when there is Spare Capacity?
- Aggregate demand my shift to the right
– through fiscal policy (real output will increase without causing an increase in the price level)
What happens at the Bottleneck section of the Aggregate Supply curve?
- Constrictions in the supply chain cause cost and wage pressures to build up.
- usually about labour, which when in short supply causes wages to increase.
What causes prices to rise at the bottleneck section of he backward bending supply curve?
Labour (wages)
On the backward bending AS curve, at the bottleneck section what causes the price to increase (Inflation)?
- in order to attract more workers firms have to increase wage rates to draw more workers in.
- which will have an effect on the costs of production
- Cost Are then reflected onto the consumer
When at full capacity, are all viable workers in work?
Yes
When at full capacity all potential workers are in work so how do firms get more workers?
- Firms have to entice workers away from other jobs
- They do this by offering higher wages
When AD increases, when on the full capacity part of the backward bending supply curve, what is the long term affect?
- Increased Inflation
- No increase in output
According to the Classical economists, can the economy be in equilibrium whilst there is unemployment?
No
What is the Vertical Axis on and AD/AS?
Price level
What are the factors in the Labour Market that shift AS to the right?
- Changes in the Relative Productivity
- Changes in Education and Skills
- Demographic changes and Migration
- Increased in Health Spending
How does Changes in Relative Productivity cause the AS curve to shift right? (Labour Market)
- Productivity is OUTPUT per unit INPUT, if it increases with a country’s main trading partners, the gap is said to be closing
How does Changes in Education and Skills cause the AS curve to shift right? (Labour Market)0
- Increased Spending on education and training should mean that a country’s workforce can produce more output per worker
- EDUCATION INCREASES THE VALUE OF POTENTIAL OUTPUT
How does Demographic changes and migration cause the AS curve to shift right? (Labour Market)
- Decreasing birth rate and increasing life expectancy will cause the labour supply to worsen
- Changes in the supply of labour shift the AS curve
How does Increases in Health Spending cause the AS curve to shift right? (Labour Market)
- An increase in resources in the health sector should mean that workers have fewer days off sick and are active for longer.
- Can work beyond retirement ages
What is meant by the term Supply Side Policies?
are government attempts to increase productivity and shift aggregate supply (AS) to the right.
What are Free-Market Supply-Side Policies?
involve policies to increase competitiveness and competition
What are Interventionist Supply-Side Policies?
involve government intervention to overcome market failure.
In theory what should Supply Side Policies do?
should increase productivity and shift long-run aggregate supply (LRAS) to the right.
What are the Consequences of Supply-Side Policies?
- Lower Inflation
- Lower Unemployment
- Improved Economic Growth
- Improved Trade and Balance of Payments
By implementing Supply-Side Policies how can Lower Inflation be achieved?
- Shifting AS to the right will cause a lower price level
- This is because the economy is more efficient
- Supply-Side Policies help reduce cost push inflation
By implementing Supply-Side Policies how can Lower Unemployment be achieved?
- Supply-side policies can contribute to reducing structural, frictional and real wage unemployment.
- Therefore help reduce the natural rate of unemployment.
By implementing Supply-Side Policies how can Improved Economic Growth be achieved?
- Supply-side policies will increase the sustainable rate of economic growth by increasing LRAS
- This enables a higher rate of economic growth without causing inflation.
By implementing Supply-Side Policies how can Improved trade and Balance of Payments be achieved?
By making firms more productive and competitive, they will be able to export more
3 examples of Free Market orientated Supply-Side Policies.
- Privatisation - sell state owned assets to private sector, improve profit incentives.
- Deregulation - Allow new forms to enter a market, open monopolies to competition
- Income Tax Cuts - greater incentive to work longer hours
2 examples of Interventionist Supply-Side Policies.
– Public sector investment - In infrastructure, improve transport and reduce costs
- Education - increase funding to schools and universities, improve labour productivity
Limitations of using Supply Side Policies?
- Productivity growth depends largely on private enterprise and trends in technological innovation.
- In a recession, supply-side policies cannot tackle the fundamental problem which is lack of aggregate demand.
- Time. All supply-side policies take a long time to have an effect. Some policies, such as education spending may not influence the economy for 20-30 years.
What are the factors in the product market that shift aggregate supply to the right?
– Technological advances
– changes in government regulation
– competition policy and reduction in barriers to international trade
How does Technological Advances cause the AS curve to shift right? (Production market)
– Innovation and investment in new ideas tend to reduce costs for all firms
How does Changes in Government Regulation cause the AS curve to shift right? (Production Market)
– Regulations in the UK economy that have been imposed to try to maintain a disciplined economy
– These regulations have been increasingly deregulated
– reduces costs faced by firms
How does Competition Policy and Reduction in the Barriers to International Trade cause the AS curve to shift right?
– As a country opens up to more trade, competition drives down prices and inefficient domestic firms give way to overseas the firms with a competitive advantage.
– therefore, as globalisation develops, aggregate supply increases.
When I can get demand me to aggregate supply what does this create?
Equilibrium real output and price level
What will the change in the components of the aggregate demand equation, C plus I plus G plus (X minus M) lead to?
– Shift in the aggregate demand curve
– with multiplier effects
If A.D. increases what is likely to happen to the price level and output?
Both will rise(Depending on the price elasticity of the aggregate supply curve)
