2.3 - Aggregate Supply Flashcards
Aggregate supply
The total quantity of goods and services that firms in an economy are willing and able to produce at a given price level over a period of time
Short run
A period in which at least one factor of production is fixed, meaning firms can adjust output by changing variable inputs (e.g., labor) but cannot expand capacity (e.g., capital or land)
Long run
A period in which all factors of production are variable, allowing firms to adjust capacity, invest in capital, and respond fully to changes in market conditions
Factors influencing short run aggregate supply
- Changes in costs of raw materials and energy
- Changes in exchange rates
- Changes in tax rates
How changes in costs of raw materials influence short run aggregate supply
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 changes in exchange rates influence short run aggregate supply
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
How changes in tax rates influence short run aggregate supply
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
The two types of long run aggregate supply curve
- Classical
- Keynesian
Factors influencing long run aggregate supply
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
How technological advances influence long run aggregate supply
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
How changes in relative productivity influence long run aggregate supply
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 changes in education and skills influence long run aggregate supply
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
How changes in government regulations influence long run aggregate supply
Government regulations are able to impact LRAS through a number of different ways, such as by increasing the size of the workforce or they could make it easier to set up businesses and increase incentives to be entrepreneurial (i.e. lower corporation tax) which would increase companies, jobs and output so increase LRAS.
How demographic changes and migration influence long run aggregate supply
If immigration is higher than emigration, the population will grow and so therefore there will be more workers which will increase the LRAS
How competition policy influences long run aggregate supply
The government can promote competition between businesses and markets which will force them to improve the quality of their goods or lower prices. In order for businesses to do this and still make a profit, they have to improve their efficiency and this efficiency will mean that more goods and services can be produced, so LRAS will increase
