2.3 Aggregate Supply Flashcards
Aggregate supply
the volume of goods and services produced within the economy at a given price level. It indicates the ability of an economy to produce goods and services and shows the relationship between the real GDP and the average price levels.
Is SRAS elastic or inelastic?
Elastic
Long run vs Short run
Short run is the period of time when at least one factor of production is fixed and cannot be changed. On the AS curve, in the short run, money wage rates, factor prices (prices of the factor of production) and the state of technology are fixed and can’t change; a change in
these results in a shift of the curve. In the long run, all factors of production are variable.
Factors influencing SRAS
-changes in cost of raw materials and energy
-change in exchange rates
-change in tax rates
Changes in cost of raw material and energy
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. Oil prices are an important cost in determining the level of SRAS, since they affect costs for almost all businesses.
Change in exchange rates
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. This is particularly important in the UK as we are heavily dependent on imports. The inflation the UK experienced after Brexit was caused by the fall in the
pound, which pushed import prices up and led to cost-push inflation.
Change in tax rates
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.
In the short term how can supply be increased
Overtime but in the long run there will
be a limit on how much supply can be increased.
what does a shift in long run AS mean?
the economy can produce more
Factors that influence LRAS
-Technological advances
-changes in relative productivity
-changes in education and skills
-changes in government regualation
-demographic changes and migration
-competition policy
Technological advances
-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
Changes in relative productivity
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.
Changes in education and skills
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
Demographic changes and migration
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.
Comeptition policy
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.
