2.3 - Aggregate supply Flashcards
Definition of Aggregate supply
The total value of goods and services produced in an economy over a given period of time
Why is the supply curve upward sloping?
At a higher price, firms are willing to supply more because they can earn greater profits
What is the difference between SRAS and LRAS?
SR - one factor of production is fixed
LR - all factors of production is variable (changes to the quantity/quality of the factors of production) - e.g. in the LR, wage rates are variable and can change
Factors influencing SRAS
- Changes in costs (raw materials and energy)
- Changes in ER (depreciation = pushed prices of M)
- Changes in government policy / regulation (e.g. taxes = increases cost of production = increase in SRAS)
- Cost in employment (wages, labour productivity)
What is Long Run Aggregate Supply (LRAS)?
Measures an economy’s productive capacity (potential output)
Why is it possible for SRAS to exceed maximum capacity and why this is not possible in the LR?
This is because firms can allow factors of production to run overtime / not allow maintenance of machinery
However, in the LR, this is not possible due to workers needing a break and machine depletion
What is Keynes view on wages?
“Sticky downwards” - wages can increase easily but move down with difficulty
Why is this?
- Trade unions - they will not allow wages to fall too low
- Incentive - businesses will be unwilling as this would cause a lack of productivity (demotivation) through lower wages
- Unemployment - workers will be willing to work when a certain level of wage is offered
- Lack of labour mobility
- Minimum wage - wages cannot fall below a certain level
Draw both a Keynesian and Classical LRAS diagram
Factors influencing LRAS?
- Technological advancement
- Changes in relative productivity
- Changes in skill / education
- Changes in government regulation / policy
- Demographic changes
- Competition policy
How does technological advancement boost LRAS?
Increased investment in technology = increased machinery = increased productivity / output as this will speed up the factors of production where more goods would be produced using the same amount of resources
How does relative productivity boost LRAS?
Productivity depends on efficiency, skill of labour and technology = increased productivity = increased production/output of goods
How does skill / education boost LRAS?
Skilled workforce = higher chances of employment = increased efficiency in job = increase output per worker = increase in overall productivity = boost LRAS
Education = higher human capital = increase occupational mobility of labour = reduces structural unemployment = resources are utilised efficiently
How does government regulation impact LRAS?
- Impact size of workforce by encouraging more people to work and decrease level of inactivity
- free childcare, reduce benefits, increase working age
This will shift LRAS as there are more resources in the economy = more production - Increase research and development
- offer tax breaks to businesses who invest in research and development
- if they find good idea, productivity will increase - Easier set up for businesses
- they can make it easier to start a business and increase entrepreneurial spirit through lower corporation tax - helps firms create more jobs and therefore output - Regulation
- high regulation = higher cost of production + time = decrease in output = shift in of LRAS
How does demographic changes impact LRAS and what is the evaluation for this?
Higher immigration = Higher population = increased number of workers to hire = boost LRAS as this would make it cheaper to hire workers
Eval - however, depends on the value of the immigrants
- they need to be skilled (i.e. possess a high human capital) and be of working age to actually contribute to the economy in the form of productivity
