2.3 Aggregate Supply LS4 Flashcards
Why is macroeconomic supply curve called aggregate supply curve?
Because it is the sum of all the industry supply curves in the economy
Why is SRAS upward sloping?
Is the combined curve for all industry supply curves in the economy which are all upward sloping
Assumes that firms wish to increase their level of output and production costs increase as output increases so prices increase
Why is SRAS price elastic?
Firms can increase output in the short term by getting workers to do overtime
What does SRAS assume?
What is the short run period defined as?
That money wage rates and the prices of all factor inputs in the economy are fixed, and that firms wish to increase their level of output
What causes movements along the SRAS curve?
Changes in real output
Changes in price levels
What causes a shift in SRAS?
Wages
Raw material costs (exchange rates)
Taxation/Subsidies
Productivity
Changes in costs of production
What is meant by a supply-side shock?
When there is a large change in the costs of production
E.g. war caused huge increase in the price of oil
Describe LRAS
Has capacity constraints (limit to how much firms can increase their supply)
AS curve vertical at a fixed given level no matter what the price level is
No underutilised resources
What does LRAS show?
The productive potential of an economy
What causes a shift in LRAS?
- Technological advances
- Changes in relative productivity
- Changes in education/skills
- Changes in gov. regulations
- Migration/demographic changes
- Competition policy (policies that increase competition amongst firms)
- Enterprise and risk taking
- Factor mobility
- Economic incentives
Anything that changes the quality and quantity of factors of production
What do Keynesian economists believe about the LRAS curve?
That an economy can operate below full capacity
(More realistic model)
What do Keynesian and classical economists agree on?
That AD is downwards sloping and SRAS is upwards sloping
LRAS is vertical at full capacity
In the short run, what effect does a rise in AD have on equilibrium output?
Increases
Why might wages be ‘sticky downwards’ in a modern economy?
National minimum wage
Low wages can demotivate workers and lead to lower productivity
