2.3 - Aggregate Supply Flashcards
What is the Aggregate Supply curve?
It is the volume of goods and services produced within the economy at a given price level. It goes from the bottom left to top right.
What is the distinction between movements and shifts of the AS curve?
A change in the price level will lead to a movement along the curve, but a shift in the curve is caused by a range of other factors.
What is the relationship between long and short run AS?
Short run is the period of time when at least one factor of production is fixed and cannot be changed. In the long run, all factors of production are variable.
What factors influence short-run AS?
- Changes in costs of raw materials and energy.
- Changes in exchange rates.
- Changes in tax rates.
How might changes in costs of raw materials and energy influence short run AS?
An increase in the costs will increase the cost of production. This means that the curve will shift inwards as it costs more to make the same amount and therefore businesses will only produce this amount of goods if prices rise.
How might changes in exchange rates influence short run AS?
A weaker pound will lead to an increase in the price of imports, causing SRAS to decrease as production becomes more expensive. If the pound becomes stronger, imports will be cheaper and so SRAS will increase.
How might changes in tax rates influence short run AS?
Taxes increase the cost of production and this they raise a fall in SRAS, shifting it to the left. Subsidies shift the curve right as they decrease costs.
What factors influence LRAS?
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
How does technological advances influence LRAS?
This is because it will speed up production so more goods can be produced.
How does changes in relative productivity influence LRAS?
The more productive the economy is, the more that will be produced. If the UK is more productive than other countries, it will encourage production of that good in the UK, so investment will be increased, increasing LRAS.
How does changes in education and skill influence LRAS?
A more skilled workforce will be more employable and work quicker and more efficiently within their jobs, so the output per worker will increase, shifting LRAS outwards.
How does changes in government regulations influence LRAS?
High regulation on businesses will limit LRAS as it will increase costs and the time taken to undertake tasks, which will reduce output.
How does demographic changes and migration influence LRAS?
If immigration is higher than emigration, the population will grow and so there will be more workers which will increase the LRAS.
How does competition policy influence LRAS?
The government can promote competition, forcing the businesses to improve the quality of their goods or lower prices. To do this and still profit, the business has to improve their efficiency and this will mean that more goods and services can be produced, so LRAS will increase.
