2.3 Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

This is the total planned output of goods and services in an economy over a period of time

Question 2

Why is the SRAS (short-run AS) curve upwards sloping?

Answer 2

In the short run, the output of an economy is not fixed and can be increased, but this comes with added costs such as overtime and fast delivery.

Question 3

What factors influence the short run AS?

Answer 3

1. Changes in costs of raw materials - these affect the cost of production
2. Changes in exhange rates - costs fall in the UK if other currencies are weaker
3. Changes in tax - reduces costs

Question 4

What are the two shapes of the LRAS?

Answer 4

1. Neo-classical - in the long run an economy is always at full capacity and employment
2. Keynsian - backward bending L shape, unemployment can occur

Question 5

Explain the three sections of the Keynsian LRAS

Answer 5

A: Output can be increased without any inflationary pressure as there are unused resources, such as factories not at full capacity and unemployment

B: There is both growth and inflation as competition for resources increases

C: Full capacity - AD shifts only lead to inflation, no spare capacity

Question 6

Explain four factors in the labour market that influence the LRAS

Answer 6

1. Changes in productivity - this decreases costs of production per unit of output
2. Changes in education and skills - improves productive capacity of the workforce
3. Demographic changes and migration - increases population size
4. Health spending - decreases sick days and therefore boosts production

Question 7

Explain three focturs in product markets that could shift the LRAS

Answer 7

1. Technological advances - reduces costs of production so more can be produced overall
2. Changes in government regulation - increases competiton and cost efficiency
   3.