2.3- aggregate supply Flashcards
What does aggregate supply show?
The quantity of real GDP which is supplied at different price levels in the economy.
Why is the SRAS curve upward sloping?
At a higher price level, producers are willing to supply more because they can earn more profits.
What causes movement ALONG the AS curve?
Changes in the price level, due to a change in AD.
If AD increases, expansion in the SRAS
If AD falls, contraction in the SRAS
Why does the SRAS shift?
When there are changes in the conditions of supply. Change in factors of production, subsidies, technology
What is the relationship between short run AS and long run AS?
The short run is a period of time when at least one factor of production is fixed. The SRAS curve only covers the period immediately after a change in the price level. It shows the planned output of an economy when price change, whilst cost of production and productivity are kept constant.
The LRAS shows the potential supply of an economy in the long run. Prices, costs and productivity of factor inputs can change. This curve is vertical because supply is assumed to NOT change as price level changes.
What factors can influence the short run AS?
- cost of raw material, a rise would lead to decrease of SRAS.
-A stronger currency reduces price of imports, imports of material would be cheaper. AS would shift out. - Increased tax- decrease SRAS.
What does the Keynesian long run- AS curve suggest?
- the price level in the economy is fixed until resources are fully employed.
-Horizontal section shows when resources are not fully employed, there is spare capacity.
-Vertical section shows when resources are fully employed.
-Over the spare capacity section, output can be increased without affecting price level.
-Once resources are fully employed, an increase in output will be inflationary.
What does the Keynesian long run- AS curve suggest?
- the price level in the economy is fixed until resources are fully employed.
-Horizontal section shows when resources are not fully employed, there is spare capacity.
-Vertical section shows when resources are fully employed.
-Over the spare capacity section, output can be increased without affecting price level.
-Once resources are fully employed, an increase in output will be inflationary.
What does the classical LRAS show?
-All factors of production in the economy are fully employed in the long run.
-This means changing AD only makes a change in the price level, not in national output.
What does the classical LRAS show?
-All factors of production in the economy are fully employed in the long run.
-This means changing AD only makes a change in the price level, not in national output.
How does technological advances influence LRAS?
If more money is spent on improving technology, the economy can produce goods in larger volumes.
How does changes in relative productivity influence LRAS?
A more productive labour and capital input will produce a larger quantity of output with the same quantity of input
How does changes in education and skills influence LRAS?
Improves quality of human capital, so it is more productive and more able to produce a wider variety of goods and services.
How do changes in government regulations influence LRAS?
Could limit how productive and efficient a firm can be if it is excessive.
How do demographic changes and migration influence LRAS?
If there is net inward migration and a majority of the population is of working age, the size of the labour force will increase, which means the economy can increase its output.
