2.3 Aggregate supply (AS)

Question 1

Aggregate supply

Answer 1

Measure the volume of goods & services produced within an economy at a given price level

Question 2

Short-run aggregate supply (SRAS)

Answer 2

A curve showing how much output firms would be prepared to supply in the short-run at any given price level.

In short-run firms have little flexability to vary their inputs.
As prices inc in an economy, firms want to inc output.
- only way in short run is paying existing workers overtime/pay a premium price for quick delivery of raw materials
- can only do this if they pass the costs as higher prices
- unsustainable in long run

In long-run, inc num of workers

Question 3

What causes the SRAS to shift?

Answer 3

• cost of raw materials, oil
• cost of labour; trade unions, supply/quantity of labour inc. min wage
• exchange rates (affect raw material & component costs)
• government intervention/regulation; red tape
  e. g. inc regulation, firms forced to spend more on health and safety measures/ inc corp tax
• productivity (output per employee per year)

Question 4

Aggregate supply curve

Answer 4

shows the total supply in an economy at different price levels

Question 5

Long-run aggregate supply

Answer 5

Output that can be produced with the full employment of resources.
Shows the productive capacity of the economy.
Yfe is the full employment level of output

Question 6

What factors shift the LRAS

Answer 6

Shift caused by changes to the quality of quantity of FoP
Labour
- Education & skills 
- Size of population 
- Health spending

Capital
- technological advances

Labour, land & capital
- regulation/law changes

Land
- Available land & raw materials

Level of entrepreneurship

Question 7

When does the aggregate supply curve become inelastic?

Answer 7

When economy reaches its level of full capacity, since even at higher prices, firms cannot supply more in the short term.

Question 8

Classic/monetarist view of the SRAS and LRAS and wages

Answer 8

Suggests in short-term AS can be elastic.
Long-term is inelastic.
Workers would adjust their wage expectations downwards causing SRAS2 to fall back to SRAS1, returning the economy to full employment.

Question 9

Keynesian view of wages

Answer 9

Wages would take a long time to fall as they are sticky downwards, meaning the economy could be stuck below its potential for a long time.

Question 10

Factors influencing the LRAS

Answer 10

• technological advances
• changes in relative productivity
• changes in education and skills
• changes in education and skills
• changes in government regulations
• demographic changes and migration
• competition policy