2.3 AGGREGRATE SUPPLY (AS)

Question 1

Aggregate Supply

Answer 1

is the total of all industry supply curves in the economy. It shows how much output firms wish to supply at each level of prices.

Question 2

Why is it upward sloping?

Answer 2

1 - higher prices mean firms make more profit so more goods and services will be produced.
2 - as more goods + services are produced, businesses short run costs increase is prices are higher in response.

A change in real output leads to a movement along the SRAS and a change in price level.

Question 3

What causes a shift in SRAS?

Answer 3

Production costs - an increase in the costs of production and firms increase prices to cover:

Significant production costs are:

• Raw materials
• Taxation
• Exchange Rates = if the exchange rate falls this leads to more expensive imports and therefore a price rise across the economy and a shift in SRAS upwards.
• Productivity = is output per unit of imput employed. Labour productivity is output per worker.

Improvements in productivity due to better tech or training will lead to shift in SRAS downwards.

Question 4

Long Run Aggregate Supply (LRAS)

Answer 4

The LRAS is vertical as there is a limit on how much firms can increase their supply.

There is a limit to the amount of labor available, capital equipment and productivity so in the long run the level of output is fixed whatever the price level.

The LRAS curve is the level of output associated with the production of the PPF in the economy.

Classical position assumes the economy will either be at or near capacity in the long run because all costs (including wages) can be adjusted.

Question 5

Output Gap

Answer 5

Difference between Ye and Y1 (is either positive or negative)

Question 6

What causes shifts in LRAS?

Answer 6

• Tech advances
• Productivity relative to competitive economies
• Education and skills
• Government regulation
• Demographic changes + Migration
• Competition policy
• Enterprise + Risk taking
• Mobility
• Economic incentives
• Structure of the economy

Question 7

Keynsian LRAS

Answer 7

Demand side expansionary policies lead only to inflation using the classical model BUT the Keynsian model suggests they can lead to economic growth as well.