2.3 Aggregate supply Flashcards
what is aggregate supply?
is the quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices in a given time period
what does the short run mean?
the period of time in which at least one factor of production is fixed
what does the long run mean?
the period of time in which all factors of production are variable
what is short run aggregate supply?
the positive relationship between planned national output (GDP) and the general price level
when does SRAS slope upwards?
when there’s a positive relationship between the price level and GDP
what does a rise in general price level cause?
an expansion of aggregate supply as businesses respond to the profit motive
what factors affect the short run supply curve?
if production cost rise SRAS will shift inwards
- Wages
- Raw materials/commodity prices
- Oil prices
- Business taxes
- Import prices/exchange rate (SPICED)
- Supply side shocks
Keynesians belief of supply?
do not distinguish between short term and long term AS instead considering supply as a whole
- No such thing as LRAS or SRAS
- There isn’t one LRAS that the economies always operating at in the long run
- Closer we get to YFE, the more squeezed the spare capacity is (eg less labour so wages will have to increase to entice workers, passing cost onto consumers with higher prices) and once we reach YFE we will just be contributing to inflation
- in the Long run we aren’t neccesarily going to be at the YFE point
Neo classical economics belief of supply?
distinguish between the two
- At a certain point an economy will reach its LRAS as it will be at YFE (all resources of production are fully exploited, to a sustainable level)
Factors influencing long-run AS?
Q2 Cell/productive efficiency
Q2 = quality and quantity
C = capital
E = enterprise
* Investment (R+D)
* Competition/productivity (firms will want to reduce costs and be more efficient)
* Technological developments
* Govt regulations
L = land
* Infrastructure
* New resource discovery
L = labour
* Labour productivity
* Education and skills
* Quantity of labour (immigration/incentives to make people active)
what causes short run aggregate supply to change?
cost of production
- wages
- raw materials
- oil price
- business tax
- import prices (SPICED, WIDEC)
➡️ creates shocks in the economy
what causes long run aggregate supply to change?
productive efficiency
- ⬆️ labour producitivity
- ⬆️ investment
- ⬆️ infrastructure
- ⬆️ quantity of labour
- competition
