2.3 Flashcards
What does the AS curve represent?
The volume of goods and services produced within the economy at a given price level
Indicates the ability of an economy to produce goods and services and shows the relationship between real GDP and average price levels.
How do businesses typically respond to an increase in production in the short run?
By increasing the hours of work for existing employees, hiring temporary workers, or offering overtime incentives
This avoids the commitment to permanent staff and potential redundancy costs.
What happens to the average and marginal cost of labor per good produced when production increases?
They rise, leading to increased prices for consumers
Even if basic wage rates remain constant.
What is the expected elasticity of short-run AS?
Likely to be elastic
Output is relatively responsive to a change in price.
What causes a movement along the short-run AS curve?
A change in the price level
This results in contraction or expansion.
What defines the short run in terms of production factors?
At least one factor of production is fixed and cannot be changed
Money wage rates, factor prices, and state of technology are typically fixed.
What is the main cause of a shift in the short-run AS curve?
A change in the cost of production
Influenced by factors such as raw material costs, exchange rates, and tax rates.
How do changes in raw material costs affect SRAS?
An increase shifts the SRAS curve left
Higher production costs mean businesses will only produce the same amount if prices rise.
What effect does a weaker pound have on SRAS?
It decreases SRAS
Increases the price of imports, making production more expensive.
What role do taxes play in shifting the SRAS curve?
Taxes increase production costs, shifting the curve to the left
Subsidies, however, shift it to the right by decreasing costs.
What is the difference between short-run and long-run AS?
In the short run, at least one factor of production is fixed; in the long run, all factors are variable
Changes in fixed factors lead to shifts in the AS curve.
What is the classical view of the long-run AS curve?
AS is independent of the price level and determined by the level of all factors of production and technology
Represents a country’s potential output.
What does the vertical LRAS curve signify?
The economy naturally moves towards equilibrium where all resources are fully employed
Reflects the classical view that markets correct themselves quickly.
What did Keynes argue about the LRAS curve?
It can be in disequilibrium for extended periods, thus it cannot be entirely vertical
Wages and prices tend to be ‘sticky downwards’.
What does the bottleneck on the LRAS curve mean?
There is spare capacity within the economy
output becomes more price inelastic
Firms do not need to offer high wages to attract staff due to high unemployment.
What factors can shift the LRAS to the right?
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
These factors generally increase productivity or resources.
How do technological advances impact the LRAS curve?
Shift it to the right
Increases production speed, allowing more goods to be produced with the same resources.
What effect do changes in education and skills have on LRAS?
They increase output per worker, shifting LRAS to the right
Improves employability and efficiency.
How can government regulations influence LRAS?
By increasing the workforce size and encouraging research and development
High regulation can limit LRAS due to increased costs.
What is the relationship between immigration and LRAS?
Higher immigration can increase LRAS
Depends on the age and skills of immigrants; a larger working-age population increases production capacity.
What is the impact of competition policy on LRAS?
Promotes efficiency and can increase output
However, less competition can also encourage investment and innovation.
keynsian curve structure
horizontal phase- spare capacity, no inflation
upward sloping (bottleneck)- some resource shortages, inflation, wages and costs rise
vertical (full capacity)- full employment, increase in demand causes inflation
