2.3 Aggregate Supply Flashcards
What is aggregate supply?
AS – The total amount of goods services supplied by an economy over a set period of time.
What are factors influencing the level of supply?
Costs of production
Levels of investment throughout the economy.
Supply-side policies (policies set by the government that aim to help increase supply.)
Availability and efficiency of factors of production.
What is the difference between LRAS and SRAS?
Long run is based on the economy being at full employment and working at full capacity.
It is determined by factors such as land, labour, capital and enterprise rather than price levels. It is when there are no fixed factors of production.
On the other hand in the short run firms may have limited flexibility in the availability in their factors of production - it is when at least one factor of production is fixed.
What are some influences on SRAS?
Supply side shocks - Positive/Negative
Cost of capital - investment
Cost of inputs (Raw materials)
Exchange rates
Government intervention - Health and safety regulations, corporation tax.
What is the neoclassical LRAS curve?
Assumes the economy always operates at full capacity.
Any increase in AD only leads to inflation, not higher output.
Wages and prices are flexible, ensuring full employment.
What are the three stages in the Keynesian curve?
Three stages:
Spare capacity – Output can rise without inflation.
Bottleneck – some inflation as resources get used.
Full capacity – Economy at maximum output, only inflation increases.
What are factors that influence LRAS?
Technological advances
Relative productivity
Education and skills
Government regulations
Demographic changes and migration
Competition policy
How do technological advances influence LRAS?
Improvements in tech can increase productivity and efficiency.
Increased technology in:
Automation
AI
Robots
New machines
How does relative productivity influence LRAS?
Productivity – how much is produced on average per employee.
If a countries productivity increases relative to others it becomes more competitive.
Can cause an increase in FDI and investment.
How do changes in education and skills influence LRAS?
More skilled workforce will increase labour productivity.
The gov also provide different types of training courses to improve the number of skilled workers in the country.
However, opportunity cost of healthcare and it may take a long time until the money invested in schools shows through in the economy.
How do changes in government regulations influence LRAS?
Regulations can impact business’s ability to produce efficiently either positively or negatively.
Deregulations = less regulations, could attract FDI.
Increase in investment by firms – LRAS should shift right.
How do demographics and migration influence LRAS?
Migration – moving from one area to another.
Demographics – the characteristics within one population.
Changes in population size and structure affect the labour force.
Increase in migration means increase in workers – LRAS to the right.
Ageing population reduces the workforce.
How does a competition policy influence LRAS?
These are policies that promote competition in markets.
Prevents monopolies (where one firm has more than 25% of the market)
Encourages firms to enter the market.
Encourages firms to be more efficient.
