2.3 Flashcards
What is aggregate supply?
The quantity of good services that producers in an economy, are willing and able to supply at a given level of prices in a given time period
What is short run aggregate supply
Short run aggregate supply is the relationship between planned national output and the general price level. A rise in the general price level should stimulate an expansion of aggregate supply as businesses respond to the profit motive.
External factors affecting aggregate supply
– World oil and gas prices
– Energy prices/costs
– Other minerals/metal prices
– Food stuff prices
– Import tariff/quotes
Keynesians (diagram view)
Keynesians do not tend to distinguish between short run and long aggregate supply, preferring instead to just consider “aggregate supply” as a whole. For Keynesians, there is just one AS curve.
Neo-classical economists (diagram view)
Neo-classical economists, do distinguish between the short run and the long run. Therefore, Neo-classical economists will use a short run AS curve and a long run AS curve i.e. two curves.
Aggregate supply and spare capacity
When a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply is elastic.
Causes of shifts in short run aggregate supply
- Changes in resource (input) prices
- Business taxes, subsidies, regulations and imported costs
- Cost of imported components (affected by the exchange rate + fluctuations in global commodity prices)
- Unexpected Supply Shocks that affect the price of raw materials
External Factors affecting Aggregate Supply (AS)
- World oil and gas prices
- Energy prices / costs
- Other mineral / metal prices
- Foodstuff prices
- Import tariffs / quotas
What is long run aggregate supply?
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 and the availability and quality of factor inputs. This is independent of the price level in the economy. An outwards shift of the LRAS curve represents an increase in potential GDP / potential output / potential employment.
Productivity
-The 3 ways it can be measured
Productivity measures the efficiency of the production process
Productivity can be measured by:
- Output per worker employed
- Output per person hour
- Value added from each extra factor input employed
Economic Benefits of Net Inward Migration
- Migrants provide fresh skills and higher labour productivity
- An increase in the size of the active labour supply – expanding a country’s potential output
- A driver of innovation and entrepreneurship
- Positive multiplier effects if migrants find paid work
- Reducing skilled-labour shortages in growing industries
- Remittances sent home by migrants add to the GNI of home nations – creating potential for rising exports
- Tax revenues: Legal immigrants in work pay taxes and are likely to be net contributors to government finances.
Risks / Costs from Net Inward Migration
- Welfare costs: Increasing cost of providing public services
- Possible displacement of domestic workers
- Social tensions from the problems of integrating thousands of extra workers into local areas and regions.
- Rising demand for housing which forces up property prices and housing rents for many groups in the population
- Poverty risk: Migration may worsen the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market.
Evaluating the Effects of Labour Migration
- The types of people and their skills who choose to migrate from one country to another i.e. the human capital of migrants may be more significant in the long run
- The ease with which migrant workers settle into a new country and whether they find regular jobs
- Whether a rise in labour migration stimulates extra capital spending by firms and by government e.g. in new schools, hospitals, and investment by retail businesses
- The dynamic effects of migration e.g. Gains in innovation and research from notable migrant entrepreneurs, scientists and other groups
- Whether migrants decide to stay in the longer term or whether they regard it as temporary (e.g. to gain qualifications, learn a new language)
Competition policy
- Antitrust and cartels: this involves eliminating (illegal) agreements that restrict competition e.g. price-fixing
- Market liberalisation: this involves introducing competition or contestability e.g in sectors that have been dominated by large monopolistic firms (e.g. energy suppliers). This can be achieved by using deregulation, privatisation, and breaking up markets into different sectors e.g. separating energy generation from energy supply.
- State aid control: this involves analysing the role of the state in supporting industries (perhaps via subsidies) to ensure that this does not overly distort competition
- Merger control: this involves investigating mergers between firms, or takeovers, to ensure that they do not end up having monopoly power and reducing competition
Possible advantages of automation:
- Improved product quality – it is likely that fewer mistakes will be made, and precision may be improved
- Shorter working weeks for labour
- Rising productivity
- Safer working conditions
- Lower operating costs for businesses (i.e. no ‘sick days, able to operate 24 hours a day 7 days a week etc.)
