2.3 aggregate supply

Question 1

what is the definition of aggregate supply?

Answer 1

the volume of goods and services produced within the ceonomy at a given price level

Question 2

what are the axes of an AS diagram?

Answer 2

x-axis - real GDP
y-axis - price level

Question 3

how is the ‘short run’ defined in economics?

Answer 3

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

Question 4

why is the SRAS curve upward sloping?

Answer 4

the quantity supplied increases when the price rises

Question 5

what might cause such an expansion?

Answer 5

an increase in price

Question 6

what might cause such a contraction?

Answer 6

a decrease in price

Question 7

what are the conditions (shifters) of SRAS?

Answer 7

raw materials
labour productivity
exchange rate
taxation and regulation

Question 8

explain how raw materials shift SRAS

Answer 8

• 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

Question 9

explain how exchange rates affect SRAS

Answer 9

• 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

Question 10

explain how changes in taxation affects SRAS

Answer 10

• 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 11

why does AS classically take a different shape in the short run to the long run?

Answer 11

• 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

Question 12

describe the elasticity of SRAS

Answer 12

• SRAS is likely to be elastic
• sn 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

Question 13

give the factors which influence the position of LRAS

Answer 13

technological advances
productivity
education and skills
regulations
migration
competition policy

Question 14

how do technological advances influence LRAS

Answer 14

• 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 will increase the LRAS as it means that more goods can be produced because there are more machines etc

Question 15

how do changes in relative productivity influence LRAS

Answer 15

• 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

Question 16

how do changes in education and skills influence LRAS

Answer 16

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

Question 17

how do demographic changes and migration influence LRAS

Answer 17

• 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 18

how do changes in government regulations influence LRAS

Answer 18

• they can increase the size of the workforce; one way they can do this is by encouraging people to go back to work and decreasing the level of inactivity e.g. reducing benefits, reducing minimum working age
• they can offer tax breaks to businesses who invest money into research, which will encourage them to do so
• they could make it easier to set up businesses and increase incentives to be entrepreneurial (i.e. lower corporation tax) which would increase companies, jobs and output so increase LRAS
• high regulation on businesses will limit LRAS as it will increase costs and the time taken to undertake tasks, which will reduce output

Question 19

how do competition policies influence LRAS

Answer 19

• government can promote competition between businesses and markets which will force them to improve the quality of their goods or lower prices