2.3 - Aggregate Supply Flashcards
What is Aggregate supply?
Aggregate supply (AS) is the total amount of goods and services that all firms in the economy are willing to supply at a given price level in an economy in a year.
What does the Aggregate supply curve show?
The aggregate supply curve shows the amount of goods that can be produced at different price levels.
Illustrate the short run aggregate supply curve (classical)
Upwards sloping curve (left to right) With price level on y-axis and RGDP on x-axis.
What is the short-run aggregate supply curve based on?
The costs of production.
Illustrate the Keynesian AS curve
Initially a horizontal section then a curved upwards slope.
Illustrate the long run aggregate supply curve. (classical)
Vertical line (perfectly inelastic)
What does SRAS assume?
That some resources are fixed.
What does LRAS assume?
That all resources are variable
What does the classical approach in economics suggest?
That the economy is self adjusting if markets are free from government intervention.
What does the Keynesian economic theory suggest?
The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to fund public works projects like new roads, bridges, housing, schools and hospitals.
If costs of production fall where does SRAS shift? (classical)
SRAS curve shifts to the right
If costs of production rise where does the SRAS shift? (classical)
SRAS curve shifts to the left.
What factors influence short-run aggregate supply?
1- Change in the cost of raw materials: if the cost of electricity rises, the cost of production rises, thus AS decreases.
2- Changes in the costs of labour
2- Change in exchange rates: if the exchange rate of the pound increases in value against other currencies then imports become cheaper and LRAS increases.
3- Change in tax rates: if there is a reduction of taxes on employers then the costs for firms will fall and SRAS will shift to the right.
4- Change in the level of tariffs: if a country increases tariffs on its imports then the costs for domestic firms rise. This causes a leftward shift in the SRAS curve.
What factors influence long-run aggregate supply?
1- Available land and raw materials
1- Technological advances: new technology can reduce costs.
2- Relative productivity changes
3- Education and skill changes
4- Changes in government regulations
5- Demographic changes and migration: if there is a smaller workforce AS would fall
6- Competition policy.
7- Changes in Minimum wage: increasing minimum wage can cause SRAS to fall, however it can increase the productivity of workers.
Why is the Keynesian AS curve inelastic in the long run?
When the economy reaches its level of full capacity (full employment – when the economy is on the production possibility frontier) the aggregate supply curve becomes inelastic because, even at higher prices, firms cannot produce more in the short term
