[2.3] Aggregate Supply (AS) Flashcards
What is aggregate supply?
Aggregate supply is the total volume of goods and services in an economy each year. It shows the ability of an economy to produce goods to meet demand.
Why is the aggregate supply curve upward sloping?
As the general price level rises, producers are willing to supply more as a result of the profit motive (higher profits = greater profits).
What is short run aggregate supply?
Short run aggregate supply only measures the change in supply in the immediate period following a change in the price level.
Short run aggregate supply (SRAS) assumes that the price of factor inputs of production and their productivity will not change.
What is long run aggregate supply?
Long run aggregate supply measures a change in the supply level in the long-run following a change in the price level.
Long run aggregate supply (LRAS) assumes that the price of factor inputs of production WILL change with the changes in the price level.
Why is the long run aggregate supply curve vertical?
As the price level rises, so do the prices of the factor inputs of production. As a result, for a firm to build new factories or produce more, it will incur an additional cost onto itself and thus there is no profit motive to expand production.
As a result, a rise in the general price level won’t cause a change in national output (real GDP).
How do changes in the cost of raw materials and energy impact the short run aggregate supply curve?
There will be a leftward shift in the short run aggregate supply curve if the price of raw materials and/or energy increases.
This is because firms will produce less at any given price level due to the increased costs of production.
How do changes in the exchange rate impact short run aggregate supply?
If the UK currency appreciates (becomes more valuable relative to other currencies), aggregate supply will shift to the right as imported raw material will become cheaper for firms.
How do changes in tax rates impact short run aggregate supply?
A reduction in taxes will cause a rightward shift in short run aggregate supply as firms will be able to make a larger profit at each price level.
What is the Keynesian perspective on long run aggregate supply?
Keynesians believe that the price level in an economy won’t change until resources are fully unemployed.
So at any point before all resources are fully employed, the LRAS curve will be horizontal. Once resources are fully employed, the LRAS will be vertical.
What is the ‘classical’ perspective on long run aggregate supply?
The classical view states that all resources are fully employed in the long run. As a result, the aggregate supply curve is always vertical.
This means a change in aggregate demand will not affect national output (real GDP) and only impact the price level.
How might technological advances impact long run aggregate supply?
Technological advances may mean an increase in efficiency and thus more goods and services can be produced. This would cause a rightward shift in LRAS.
How might changes in relative productivity impact long run aggregate supply?
An increase in productivity will mean more output can be achieved with the same inputs and thus LRAS will shift to the right.
How might changes in education and skills impact long run aggregate supply?
Education makes the workforce more productivity, and therefore more output can be achieved.
This causes a rightward shift in long run aggregate supply.
How might changes in government regulation impact long run aggregate supply?
An increase in regulation can decrease the productivity and efficiency of firms, resulting in LRAS shifting to the left.
How might demographic changes and migration impact long run aggregate supply?
With large net immigration, the size of the workforce will increase and therefore more total output will be achieved.
This will result in a rightward shift in LRAS.
