2.2 Aggregate Demand (AD) & Aggregate Supply (AS) - Aggregate Supply

Question 1

What does AS refer to?

Answer 1

AS refers to the total value of it put of goods and services that domestic firms as a whole produce and sell at each general price level.

Question 2

What are the three ranges of the AS curve?

Answer 2

• Horizontal (Keynesian) range: National output can increase without any increase in price (AS is perfectly price elastic) as the level of real national output is much lower than the full employment level and there is an abundance of spare capacity, allowing producers to increase output production easily without having to increase the price of goods and services.
• Upward sloping (Intermediate) range: Increase in real national output is accompanied by rising price levels as resources (capital goods, raw materials and labour) become increasingly scarce as production levels rise and there is less spare capacity as resources are increasingly employed. When AD rises, the increase in output to meet the shortage of goods will cause supply bottlenecks (shortages of skilled labour) forcing firms to rely on less efficient resources (less skilled workers) making it increasingly difficult to expand output. However, the rise in prices makes production more profitable incentivising firms to increase outputs regardless ultimately causing a partial increase in output and a partial rise in prices.
• Vertical (Classical) range: There is no possible increase in output while prices continue to rise (AS is perfectly price inelastic) as the economy has reached full employment and output can no longer rise as resources are fully employed. When AD rises, only the GPL would rise and there will be no change in real output.

Question 3

What factors affect the AS curve?

Answer 3

Describe how the quality of resources, quantity of resources, level of technology employed, level of productive inefficiency in the economy and indirect taxes affect either the SRAS or LRAS.