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Economics AS > 2.3 > Flashcards

2.3 Flashcards

1
Q

What is aggregate supply ?

A

The total output of goods and services that producers in an economy are willing and able to supply at a given price level in a given time period

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2
Q

Why is it called the aggregate supply curve ?

A

Because it has the sum of all the industry supply curves in the economy

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3
Q

What does the AS curve show ?

A

It shows how much output firms wish to supply at each level of prices

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4
Q

What is the relationship between AS and the PL ?

A

It is positive

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5
Q

What does the AS curve assume ?

A
  • The prices of factor inputs remains the same

- If costs of production change the curve will shift

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6
Q

Is the AS curve elastic ?

A

Yes it is elastic

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7
Q

What is SRAS ?

A

A period in which at least one factor of production is fixed

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8
Q

What does the SRAS curve show ?

A

It shows the relationship between real output and the average price level

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9
Q

What does the SRAS curve assume ?

A

It assumes that money wage rates are constant and fixed

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10
Q

What does a change in real output do the the AS curve ?

A

It will lead to a movement along the SRAS curve and there will be a change in the PL

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11
Q

What causes a shift in the SRAS curve ?

A
  • Anything that is better for businesses will shift it downwards, to the right
  • Anything that is negative for the business will shift it upwards, to the left
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12
Q

What effect does wage rate have on the short run AS curve ?

A
  • An increase in wage rates will result in firms facing increased costs of production
  • It will lead to a rise in the average price level
  • Shift upwards of the curve
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13
Q

What effect does raw material price have on the SRAS curve ?

A
  • A fall in the price of raw materials will lower industrial costs and will lead to some firms reducing the prices of their product
  • There will be a shift downwards of the curve
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14
Q

What effect does taxation have on the SRAS curve ?

A
  • An increase in the tax will increase costs

The supply curve will shift upwards

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15
Q

What effect does exchange rate have on the short run AS curve ?

A
  • If the exchange rate falls, the price of imported goods is likely to rise. This will lead to an increase in prices throughout the economy.
  • The supply curve will shift upwards
  • If the exchange rate rises, the price of imported goods is likely to fall. This will lead to a decrease in prices throughout the economy.
  • The supply curve will shift downwards
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16
Q

What effect does productivity have on the short run AS curve ?

A
  • Increase in productivity overtime will lead to an increase in long run aggregate supply.
  • However, it will also reduce costs of production in the short run
  • This shifts the supply curve downwards
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17
Q

What is a supply side shock ?

A

It is when there is a large change in wage rates, material prices or taxation

18
Q

What is LRAS ?

A

A period in which all factors of production are variable and technological change is possible

19
Q

What does long run aggregate supply show ?

A

The LRAS curve shows how much real output can be produced with a given level of resources and technology

20
Q

Why is the long run aggregate supply curve vertical ?

A

It can be argued that in the long run, the AS curve is fixed at a given level of real output, whatever the price level

21
Q

What is the LRAS curve ?

A

It is the level of output shown by the long term average rate of growth in an economy

22
Q

What is said to exist when output is above or below the long term trend ?

A

When output is above or below this long term trend level, an output gap is said to exist

23
Q

What do fluctuations above or below the trend rate show ?

A

This shows that actual output can be above or below that given by the long-run aggregate supply curve

24
Q

What is a positive output gap ?

A
  • There is too much demand in the economy. Therefore they are overworking their factor resource. (e.g. workers work overtime and machines are used for longer).
  • Actual GDP is more than the potential GDP.
25
Q

What is a negative output gap ?

A
  • The economy is not fully using its factor resource due to its large decline in demand in the economy.
  • Actual GDP is less than the potential GDP
26
Q

Why does the LRAS shift over time ?

A
  • This is because the quantity and quality of economic resources changes over time, as does the way in which they are combined
  • These bring about a change in the productive potential of the economy
27
Q

What can affect the LRAS curve ?

A

Anything that can increase or decrease the productivity of a company to therefore increase or decrease supply

28
Q

How do technological advances shift the LRAS curve ?

A
  • Improvements in technology allow new products to be made or existing products to be produced with fewer resources
  • Increases in capital productivity shift the LRAS curve to the right.
29
Q

How do changes in relative productivity to competing economies shift the LRAS curve ?

A
  • An increase in UK productivity of a good relative to other world economies will encourage production of that good in the UK
  • Firms will therefore invest and the LRAS curve will shift to the right
30
Q

How do changes in education and skills shift the LRAS curve ?

A
  • Improvements in education and skills of workers will raise their productivity
  • This increases long-run aggregate supply and the LRAS curve shifts to the right
31
Q

How do changes in government regulations shift the LRAS curve ?

A
  • They can lead to an increase in LRAS, shift LRAS curve to the right
  • For example, making it simpler to set up a company could encourage more entrepreneurs to create companies, output and jobs
32
Q

How do demographic changes and migration shift the LRAS curve ?

A
  • Population changes that increase the size of the workforce are likely to increase LRAS and shift the curve right
  • An ageing population where the number of people of working age is shrinking will reduce LRAS and shift the curve left
33
Q

How does competition policy shift the LRAS curve ?

A
  • Government policies which increase competition amongst firms is likely to increase LRAS and shift the curve right
  • Competition is likely to force firms to be more productive and reduce their costs, or more innovative producing new products and new ways of producing goods and services
  • However, less competition can sometimes be beneficial if it encourages investment and innovation
34
Q

How does enterprise and risk taking shift the LRAS curve ?

A

Economies where enterprise and risk taking are encouraged are likely to see increases in their LRAS and shift the curve right

35
Q

How does factor mobility shift the LRAS curve ?

A
  • Increases in factor mobility are likely to increase LRAS and shift the curve to the right
  • Workers coming into the UK is likely to increase the PPF
36
Q

How do economic incentives shift the LRAS curve ?

A
  • Improvements in economic incentives can increase LRAS and shift the curve to the right
  • For example, giving tax incentives for the unemployed to take a job can reduce unemployment and increase output.
37
Q

How does the institutional structure of the economy shift the LRAS curve ?

A
  • The institutional structure of the economy determines how an economy works
  • Making the system accord more with the rule of law is to increase LRAS and shift the curve to the right
  • A stronger banking system can encourage households to save and make funds more available to firms, again increasing LRAS and shift the curve to the right
38
Q

What is the vertical LRAS curve called ?

A

Classical LRAS curve

39
Q

What is the classical LRAS curve based on ?

A

It is based on the classical view that markets tend to correct themselves fairly quickly when they are pushed into disequilibrium by some shock

40
Q

What happens if all markets are in equilibrium ?

A

There can be no unemployed resources. Hence, the economy must be operating at full capacity on the production possibility frontier

41
Q

What did keynesian economists point out ?

A

There have been times when the markets have failed to clear for long periods of time

Economics AS (11 decks)

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