2.3 Aggregate Supply Flashcards
Define aggregate supply
The total quantity supplied in an economy over a period of time at a given overall price level
Why is there a difference between short-run aggregate supply and long-run aggregate supply?
Because in the short-run, the ability of firms to vary output is dependent on the degree of flexibility the firms have in varying inputs. Usually it is inflexible , as wages are usually fixed, and if firms want to increase output, they will have to increase utilisations of existing inputs.
What are the common ways of firms increasing the utilisation of inputs in the short-run? (2)
- Paying workers overtime
- Turning up machines
Define short-run aggregate supply curve
A curve showing how much output firms would be prepared to supply in the short-run at any given overall price level
Why would the shape of the SRAS curve not be the same in the long-run?
Because firms will not want to keep paying workers overtime, as it is not good practice. Instead, they will adjust their working practices and have additional workers.
What are the three key factors affecting short-run aggregate supply?
- Changes in costs of raw materials and energy
- Changes in exchange rates
- Changes in tax rates
Why would changes in the costs of inputs lead to a shift in the SRAS curve?
If the price of inputs increase, the firms costs of production will also increase. They may then choose to supply less output at any given price.
What key input would have a large effect on SRAS if its price were to change and why?
Oil, because it is a key input for many firms in a typical commodity.
What is another example of a key input for most firms?
Labour
How would the exchange rate impact SRAS?
Changes in exchange rates would affect the domestic price of imported inputs, this affecting costs of production.
How can firms guard against sudden changes in costs due to exchange rates?
By drawing up contracts with foreign suppliers so that future prices can be specified in a way that hedges against any possible exchange rate fluctuations.
Apart from changes in tax rates, how else may the government have an effect on SRAS? (3)
- Regulation
- Minimum wages
- Health and safety measures
What is the monetarist school and what are their view?
They are a group of economists who believed that the macroeconomy always adjusts rapidly to a full employment level of output, and that monetary policy should be the prime instrument for stabilising the economy.
How would a monetarist’s LRAS curve look like?
LRAS is perfectly inelastic.
Define the natural rate of output
The long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend.
