2.3 - aggregate supply Flashcards
What is Aggregate Supply (AS)?
Aggregate Supply (AS) is the total planned output in an economy at a given price level over a certain time period. It shows the relationship between real GDP and the average price level.
What is the short run in economic terms?
The short term is a period when at least one factor of production is fixed and cannot be changed. It involves increasing utilization of existing factors of production.
What is the long run in economic terms?
The long term is a period when all factors of production are variable, allowing for adjustments to maximize output.
What is production?
Inputs converted into a final output to meet consumers’ wants and needs.
What is productivity?
Productivity measures the efficiency of transforming inputs into outputs, calculated by output per worker over a period of time.
What does the SRAS curve show?
The relationship between aggregate supply and general price level in an economy
Why does the SRAS curve slope upward?
The SRAS curve slopes upward because firms can increase output temporarily by using measures like overtime, raising production costs. In the short run, firms’ costs rise as output increases, leading to higher prices.
What are factor prices?
Factor prices are the costs associated with inputs used in production. These remain constant in the short run, though as output increases, the average marginal cost for factors of production for a good will rise as more is paid for every good produced.
Why is SRAS considered elastic?
SRAS is generally elastic, meaning that increases in output by firms lead to only moderate increases in costs, resulting in a smaller rise in prices.
What effect does a fall in the general price level have on AS?
A fall in the general price level causes an extension of aggregate supply (AS), encouraging firms to produce more.
What effect does a rise in the general price level have on AS?
A rise in the general price level causes a contraction of aggregate supply (AS) as higher prices may reduce demand.
What causes movements along the SRAS curve?
Movements along the SRAS curve are caused by changes in the price level, while shifts are caused by changes in production costs
What factors cause shifts in the SRAS curve?
Shifts in SRAS are caused by changes in production costs such as raw material costs, energy prices, exchange rates, taxes, subsidies, wages, and overhead costs.
How do supply-side shocks impact AS?
Supply-Side Shocks are major unexpected changes that can also shift the LRAS but mainly the SRAS
What does the LRAS curve show?
In the long run, the economy reaches its maximum productive potential as all factors of production can be adjusted, so there is a limit on how much supply can be increased as can’t after YFE is reached
What is YFE?
Maximum level output economy can produce using all factors of production at sustainable levels – at full employment (natural unemployment rate)
What is the Classical view of the LRAS curve?
The Classical view holds that the LRAS curve is vertical, as output is fixed by the economy’s productive capacity and is independent of price levels. Markets naturally move towards equilibrium, where YFE is reached.
What is the Keynesian view of the LRAS curve?
The Keynesian view suggests that the LRAS curve is horizontal (perfectly elastic - an increase in AD met without inflation) at low output levels (with spare capacity) and becomes vertical (perfectly inelastic/more inelastic - increase in AD met with inflation) at full capacity, where prices rise as need for extra employment when firms compete for skilled labour and scarce resources
What does the Keynesian view suggest?
Wages and prices don’t adjust easily due to spare capacity, making the curve “sticky” and allowing for prolonged unemployment, can produce less than YFE
What factors causes shifts in the LRAS curve.
The LRAS curve shifts due to changes in the quantity and quality of factors of production and productive efficiency. Changes in SRAS due to costs of production causes the K.LRAS curve to shift ‘up’ or ‘down’ respectively, so no change in maximum output
Shifts in LRAS are caused by:
* Technological advances
* Improvement in education and skills, allowing a skilled and innovative workforce
* Government regulations such as policies affecting workforce size, research incentives and enterprises/startup ease (tax benefits and grants which can increase employment)
* Demographic changes (migration and working/old age)
* Competition policy as increased competition promoted by GOV
* Proper market mechanism and efficient capital market (ie. banks), especially in developing countries where individuals lack property rights which the government should intervene and resolve
* Wars and natural disasters
* New resources discoveries
* Infrastructure
* Investment
