2.3 Aggregate Supply Flashcards
What is Aggregate Supply?
Total amount that producers in a whole economy are willing to supply at a given price level in a given time.
AS in the short term
One factor of production is fixed. e.g. capital. This means that if a firm wants to increase capital in the short run.
AS in the long term
A situation where all main factors of production are variable. The firm has time to build a bigger factory and respond to changes in demand.
Why SRAS graph is diagonal left to right upwards
High Prices: More employees
More Output
More Purchases
Low Prices: Less employees
Less Output
Less Purchases
Why LRAS graphs is flat upwards
The LRAS depends on the available resources, capital, entrepreneurship and technological advancements.
Causes of a shift in Aggregate Supply
Changes in input prices: Wages increase
Raw materials
Energy prices
Labour productivity
Businesses Taxes, Subsides, Regulations and Imported costs
Supply shocks e.g. hurricanes effecting delivery and global trade
Demand Side Shock
When demand from the economy suddenly drops
Supply side shock
When supply from the economy suddenly drops
Stagflation
When demand increases but supply decrease causing no change in GDP but and increase in GPL
Comparing the Short run and the Long Run: The Short Run
Fixed level of capital. However, in the short run you can increase existing factors of production e.g. workers doing overtime
Comparing the Short run and the Long Run: The Long Run
Amount of capital can be increased so that the curve is determined by the size of the workforce, the total capital, levels of education and labour productivity.
LRAS line represents…
Shown as a vertical line showing the total output if all resources are fully employed. It represents a point on the product possibility curve.
A rise in the LRAS line shows
A rise in productive potential
The Classical Range
At full employment, the price level has no impact on total output. Shifts in the AD curve leads to a change in the price level, but no change in Aggregate output.
The Intermediary Range
When there’s a trade off between more output and higher prices, you have to accept information if you want more growth. The economy is approaching full employment so prices start to increase.
Economy usually is operating in this section
