2.3 AS Flashcards
Aggregate Supply
-Total quantity of g+s in economy producers and willing and able to supply at different price levels
Short run vs long run
SRAS:
-upward sloping as prices of inputs (e.g. wages) are sticky
-and high prices can temporarily increase profit margins leading firms to increase production
LRAS:
-All inputs are flexible
-Output is not determined by price but quality and quantity of factors of production
Factors influencing SRAS: Changes in costs of raw materials and energy
-Increase in cost increases cost of production
-SRAS shifts inward
-e.g. 2008 oil price shock
Factors influencing SRAS: exchange rates
-Weak currency increases price of imports
-higher cost of production
-SRAS shifts inward
-PArticularly important in UK - heavily dependent on imports
-e.g. post-brexit pound depreciation - led to cost push inflation
Factors influencing SRAS: changes in tax rates
-Increases cost of production
-Shift SRAS left
Classical LRAS
-AS is independent of price level in LR
-Determined by quality and quantity of FOP
-Vertical at full employment
-Economy self-adjusts to full employment so gov intervention is deemed unecessary
Keynsian LRAS
-Unemployment and idle capacity exists in economy
-In SR output can be increased without causing inflation until full employment is reached
-Gov intervention like fiscal policy can help achieve full employment without causing inflation in short-run
Horizontal: at low levels of output and employment firms can increase production without raising prices due to unused capacity and high unemployment - wages can be kept low
Upward slope: Increasing pressure on wages and prices as labour is becoming scarcer and firms want to attract the best workers
Vertical:Full employment and any further demand will only lead to higher prices not more demand
Factors influencing LRAS: technological advancement
-Increase productivity
-More output from same input of labour and capital
-e.g. modern day - streamlined communication
Factors influencing LRAS: Changes in relative productivity
-Increase in productivity in one sector can shift resources optimising overall efficiency of the economy
-If the UK is more productive than other countries it will encourage production of that good in the UK which increases investment - LRAS increases
Factors influencing LRAS: education and skills
-More skills make people more employable and work more efficiently
-Output per worker increases
-Improves occupational mobility of labour which decreases structural unemployment
Factors influencing LRAS: gov regulations
-Deregulation can increase efficiently
-Encourage stay-at-home mums to work by offering free childcare
-Reduce JSA to encourage working
-Tax breaks to businesses willing to invest into r+d
-High regulation limits LRAS as costs increase and time taken to do tasks increases
Factors influencing LRAS: demographic changes and migration
-High immigration increases pool of workers increasing LRAS
-Aging population shrinks workforce
Factors influencing LRAS: Competiton policy
-Promoting competition leads to higher productivity
-Businesses improve quality of their goods and improve efficiency to maintainn profits
-Low competition can also enhance LRAS as it enourages investment and innovation
