2.3 AS Flashcards
Define short-run aggregate supply (SRAS)
A curve showing how much output firms would be prepared to supply in the short run at any given price level
Define VAT
VAT (value added tax) is an indirect tax on sales revenue paid by businesses
Define commodity prices
The price of raw materials and primary products
Define costs of production
Raw material, wages, taxes etc. that are included in how much it costs a firm to produce something
Define national minimum wage (NMW)
The lowest wage it is possible to pay a worker without breaking the law
Define the natural rate of output
The long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend to
Define the natural rate of unemployment
The unemployment rate that will exist when the economy is in long-run equilibrium
What is the difference between between Monetarists and Keynesian followers?
Monetarists believe the macroeconomy will always adjust to the full employment level of output, Keynesians believe the macroeconomy can settle at an equilibrium below full employment
Why is the AS curve upward sloping?
As at higher prices, producers are more willing to supply
What causes a movement along the AS curve?
A change in price level
Name 3 causes of a shift in the AS curve
Change in resource prices
Business taxes and costs
Supply shocks
Define short run and long run
Short run is where at least one factor of production is fixed, long run is where all factors are variable
What is the equilibrium?
When AD = AS
What happens to the equilibrium if AD increases?
Equilibrium is at a higher GPL and higher level of output, unemployment will fall
What does LRAS curve measure?
Productive potential of an economy when all resources are fully and efficiently used
Name 6 factors influencing the LRAS curve
Technological advances
Productivity
Education and skills
Government regulations
Demographics and migration
Competition policy
What is non-inflationary growth?
When an outward shift in AD can be met without an increase in price level
(as SRAS is highly elastic)
What is the relationship between SRAS and LRAS?
In the long run wages rates and other costs can change, along with productivity and technology. LRAS shows the productive potential of the economy and links to PPFs. SRAS holds these long run variables constant.
Name 3 factors affecting SRAS
Wage rates
Commodity prices
VAT change
Define spare capacity
When the factors of production are not working as hard as they could under normal working conditions and there is unemployment in the economy
Explain why the Keynesian AS curve is shaped like it is
- The flat part is where there is spare capacity
- Starts to slope upwards because an increase in output causes the price level to rise as labour is getting scarce and wages are starting to rise
- Vertical at the maximum capacity of the economy as any addition to AD will cause inflation.
Explain why the Classical LRAS curve is shaped like it is
Shows maximum capacity of the economy - can only increase if shifted outwards, e.g innovation
