2.3 Aggregate Supply

Question 1

what does the aggrigate supply curve show

Answer 1

this shows the quantity of real GDP which is supplied at differnt price levels

Question 2

why is the SRAS curve slopping upwards

Answer 2

The SRAS curve is upward sloping because at a higher price level, producers are willing to supply more because they can earn more profits.

Question 3

what is the difference between a long run and short run AS curve

Answer 3

Short run is the period of time when ​at least one factor of production is fixed and cannot be changed.

In the long run, ​all factors of production are variable​. There is disagreement amongst economists on the shape of the LRAS

Question 4

what are some factors influencing short run AS

Answer 4

• cost of raw materials and energy
• a stronger currency reudces the price of improts so products are cheaper
• increased tax rates

Question 5

what are some factors influencing long run AS

Answer 5

technoligcal advances

changes in realative productivity

changes in education skills

demographic changes and migration

a competition policy

Question 6

Draw a classic SRAS curve

Question 7

What makes the aggregate supply curve

Answer 7

Aggregate supply is the ​volume of goods and services produced within the economy at a given price level.

Question 8

How can firms increase production

Answer 8

• Firms may decide to take on temporary workers
• get present workers to work overtime

Question 9

Why do firms only increase production at higher prices

Answer 9

In order to get workers to work over time they would have to offer some form of incentive therefore both the ​average and marginal cost of labour per good produced will rise​. the business is paying more in wages for every good they produce. This would be passed on to the consumer in terms of increased prices and there only needs to be rising prices in some sectors for the price level of the economy to rise.

Question 10

Why is short run AS likely to be elastic

Answer 10

An increase in output by firms is likely to lead to an increase in costs which leads to a rise in prices as they pass these costs onto consumers. However, because the factor prices are constant, the increase in prices will be relatively small. If demand falls firms will react by cutting prices in an attempt to stimulate sales. However, they will not be able to achieve much of a reduction because of constant prices and an unwillingness in the short run to lay off workers.

Question 11

Why does cost of raw materials shift SRAS

Answer 11

An increase in the cost of raw materials and energy increases the cost of production. This means the SRAS curve will shift left as it will cost more to make the same amount of goods and therefore businesses will only produce this amount of goods if prices rise.

Question 12

Why do changes in exchange rate shift SRAS

Answer 12

A weaker pound will lead to an increase in the price of imports and this will cause SRAS to decrease as production becomes more expensive. If the pound becomes stronger, imports will be cheaper and so SRAS will increase.

Question 13

Why do changes in the tax rates shift SRAS

Answer 13

Taxes increase the cost of production and thus they cause a fall in SRAS, shifting it to the left. Subsidies shift it the curve right as they decrease costs.

Question 14

What is called when there is a significant change in a factor which effects SRAS

Answer 14

Supply side shocks

Question 15

What are the key factors which determine LRAS

Answer 15

the level of all factors of production and the quality of technology​.

Question 16

What does LRAS show

Answer 16

it shows the productive potential of the economy. It shows the ​full capacity output i.e. where all resources are being fully utilised,

Question 17

Why is it possible to exceed the productive potential of the economy in the short run but impossible to do so in the long run

Answer 17

by allowing factors of production to ​work overtime or not allow time for maintenance of machinery etc. However, this is ​not possible in the long run as machines will eventually stop and workers will want a break.

Question 18

Draw a classical LRAS curve and explain it

Answer 18

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Question 19

Why is the classical LRAS curve vertical

Answer 19

although an economy can be in disequilibrium at any moment in time it will naturally move towards equilibrium position where all resources are employed and the economy is producing at its productive potential

Question 20

Draw the Keynesian LRAS curve and explain it

Answer 20

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Question 21

What does the classical LRAS curve suggest about what wages and prices when unemployment exists

Answer 21

if the curve was vertical this would mean that wages and prices fall when unemployment exists. This fall in wages thus makes it worthwhile employing people and so employment increases and the economy returns to full employment.

Question 22

Why do Keynesians not agree with classical views on what occurs when wages decrease

Answer 22

They will not fall below a certain level because:
o unions are able to prevent wages falling too low
o businesses are unwilling to risk demotivation of their staff by offering low
wages
o workers are unwilling to work unless a certain wage is offered
o there may be full employment in one area and unemployment in another area
due to lack of labour mobility
o the minimum wage means wages cannot fall below a certain level.

Question 23

Why would technological advances effect LRAS

Answer 23

Improvements in technology shift the LRAS curve to the right, meaning more can be produced. This is because it will speed up production, so more goods can be produced with the same amount of resources. Increased investment in technology, whether this be new technology or current technology, will increase the LRAS as it means that more goods can be produced because there are more machines etc.

Question 24

Why would changes in the relative productivity increase LRAS

Answer 24

The more productive the economy is, the more that will be produced with the given resources. Productivity depends on a range of factors, such as efficiency, skill of labour and technology. Additionally, if the UK is more productive than other countries it will encourage production of that good in the UK, so investment will be increased, and this will increase LRAS.

Question 25

Why would change in education and skilled effect LRAS

Answer 25

A more skilled workforce will be more employable and work quicker and more efficiently within their jobs, so the output per worker will increase, which will shift the LRAS to the right. Education could also be used to improve the occupational mobility of labour which decreases structural unemployment as people are able to switch to new jobs. This will ensure all resources are used efficiently.

Question 26

Why will demographic changes and migration effect LRAS

Answer 26

If immigration is higher than emigration, the population will grow and so therefore there will be more workers which will increase the LRAS. The value and importance of this immigration will depend on the age of the immigrants and their skills. In an ageing population or a young population, LRAS will be lower as the working population is smaller so therefore less goods can be produced. The more people who are of working age, the higher the LRAS.

Question 27

Why would completion policy effect LRAS

Answer 27

The government can promote competition between businesses and markets which will force them to improve the quality of their goods or lower prices. In order for businesses to do this and still make a profit, they have to improve their efficiency and this efficiency will mean that more goods and services can be produced, so LRAS will increase. However, less competition can sometimes be beneficial if it encourages investment and innovation. For example, copyright laws mean that businesses’ new ideas can’t be copied which will encourage them to do more research as they know they will be the ones who benefit in terms of higher profits.