2.3 Aggregate Supply Flashcards
What is aggregate supply?
The volume of goods and services produced within the economy at a given price level
It shows the relationship between real GDP and average price levels.
How does a business typically increase production in the short run?
By increasing the hours of work their employees do, hiring temporary workers, or offering overtime pay
This avoids the commitment of hiring full-time staff.
What happens to the average and marginal cost of labor when production increases?
They rise, leading to increased prices for consumers
This occurs even if basic wage rates remain the same.
What is the shape of the short-run aggregate supply curve?
Upward sloping
Firms supply more only at higher prices.
Is short-run aggregate supply likely to be elastic or inelastic, and why?
Elastic, because output changes by a bigger percentage than price
This is due to constant factor prices.
What causes a movement along the short-run aggregate supply curve?
A change in the price level
This results in contraction or expansion.
What are the characteristics of the short run in terms of production factors?
At least one factor of production is fixed
Money wage rates and factor prices are also fixed.
What is the main cause of a shift in short-run aggregate supply?
A change in the cost of production
This can be influenced by costs of raw materials, exchange rates, and tax rates.
How do changes in raw material costs affect short-run aggregate supply?
An increase shifts the SRAS curve left
Higher costs mean firms produce less unless prices rise.
What effect does a weaker pound have on short-run aggregate supply?
It decreases SRAS due to increased import prices
The UK relies heavily on imports.
What happens to short-run aggregate supply when tax rates increase?
It shifts left, reducing SRAS
Subsidies would shift it right by decreasing costs.
What limits the increase of supply in the long run?
The number of available people and machines
Supply cannot increase beyond the maximum productivity.
What characterizes the classical view of the long-run aggregate supply curve?
It is vertical and independent of the price level
It reflects the economy’s potential output.
What does the Keynesian view suggest about the long-run aggregate supply curve?
It is not always vertical, as the economy can be in disequilibrium for long periods
Wages are sticky downwards, preventing them from falling too low.
What happens to wages and employment at point A on the Keynesian LRAS curve?
Firms do not have to offer high wages to attract staff
The LRAS is perfectly elastic at this point.
