2.3 aggregate supply Flashcards
what is aggregate supply and what does it indicate
Aggregate supply is the volume of goods and services produced within the economy at
a given price level. It indicates the ability of an economy to produce goods and services
and shows the relationship between the real GDP and the average price levels.
why is the AS curve upwards sloping
In the short run (SRAS), the AS curve is upward sloping because
Prices of inputs (like wages) are sticky and do not adjust immediately to changes in the price level.
Higher prices can temporarily increase profit margins, leading firms to increase production.
what will lead to a movement along the AS curve
a change in price
what will lead to a shift in the AS curve.
a range of factors that depend on whether it is in the SR or LR.
in the SR in terms of AS, what factors are fixed.
money wage rates, factor prices (prices of the FOP), and the state of technology cannot be changed.
how does change in costs of raw amterials and energy effect the SRAS.
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.
how does change in exchange rates effect the SRAS.
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.
how does changes in tax rates effect SRAS.
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.
when do supply side shocks occur
when there are any significant changes to the three factors that efect the SRAS.
difference between SRAS and LRAS
In the short run, supply can be increased by offering overtime but in the long run there will
be a limit on how much supply can be increased.
what can change in the LRAS curve, unlike the SRAS
wage rates are variable and can change.
in the classical view of LRAS, what is it determined by
In the long run, AS is independent of the price level and is determined by the level of all factors of production and the quality of technology
what does the classical LRAS curve show
It shows the full capacity output i.e. where all resources are being fully utilised, and this can be linked to output gaps between the GDP trend line and the actual GDP.
in the classical view, why is it possible for the LRAS to exceed its maximum potential in the short run but not the long run
In the short run it is possible for an economy to exceed the maximum potential LRAS by allowing factors of production to work overtime or not allow time for maintenance of machinery etc. However, this is not possible in the long run as machines will eventually stop and workers will want a break.
why is the classical LRAS verticle
The vertical AS curve is based on the classical view that markets tend to correct themselves fairly quickly. This means although an economy can be in disequilibrium at any moment in time it will naturally move towards equilibrium position where all resources are employed and the economy is producing at its productive potential; on its PPF. This means LRAS is vertical.
difference in keynesian LRAS curve to classical.
it is not initially verticle. at the start is it horizontal before becoming verticle. keynes believed the the economy can still be below full employment even in the long run.
why does the keynesian LRAS curve start off horizontal
this is because at low levels of output and unemployment , the economy has spare or unused production capacity.
how does technological advances influence LRAS
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, whether this be new technology or current
technology, will increase the LRAS as it means that more goods can be produced because there are more machines etc.
how does changes in relative productivity influence LRAS
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. Additionally, if the UK is
more productive than other countries it will encourage production of that good in the UK, so investment will be increased, and this will increase LRAS.
how does changes in education and skills 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, which will shift the LRAS to the right. Education could also be used to improve the occupational mobility of labour which decreases structural unemployment as people are able to switch to new jobs. This will ensure all
resources are used efficiently
how does changes in government regulations influence LRAS
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.
Additionally, government policy can increase research and development as 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
