2.3 Aggregate Supply Flashcards
What is aggregate supply
Total amount produced in an economy
What causes a movement along the supply curve
Change in price level
What causes a shift along the AS curve
- changes in cost of raw materials
- changes in exchange rates
- changes in tax rates
What’s the difference between SRAS and LRAS
LRAS: All factors of production are variable
SRAS: Changes with price level due to input costs but some factors are fixed
How do increase in cost of raw materials impact SRAS
Increase cost of raw materials -> increases c.o.p -> deincetivises producers to supply -> inward shift of AS
How does exhange rates impact SRAS
Depprecistion causes weaker pound -> imports become more expensive -> demand for domestic goods decrease -> no incentive -> inward shift of AS
How does taxes impact SRAS
Increased taxes -> increases c.o.p -> disincentivise producers to supply -> inward shift of SRAS
What does the Keynesian model of LRAS show
Horizontal at low levels of output, then vertical at full capacity.
What does the Classical model of LRAS show
Vertical at full capacity (potential output), regardless of the price level.
What factors influence LRAS
- Technological advancements
- Increase productivity
- Education and skills
- Government regulations
- Demographic changes and migration
- Competition policy
How does technological advancements impact LRAS
Technological advancements -> increases productivity -> lower cost per unit -> lower c.o.p -> shifts LRAS outwards
How does education and skills impact LRAS
Workforce become more skilled -> can work more efficiently -> increases productivity -> outward shift of LRAS
How do government regulations impact LRAS
Deregulation = Outward shift
Regulation = Inward shift
How does demographic changes and migration impact LRAS
More workers migrate into the country -> increases the size of the labour force -> increases productivity -> outward shift of AS
How does competition policy impact LRAS
Encourages competition -> incentive to be more productive to maximise profits -> boosts efficiency -> outward shift LRAS
How do wage rates impact SRAS
increase in wages -> higher demand for labor -> raises c.o.p -> shifts SRAS to the right
How does availability of f.o.p impact SRAS
Labour shortages/ Reduced capital -> supply of goods decreases -> SRAS shift inwards
