2.3 - Characteristics of aggregate supply

Question 1

Aggregate supply

Answer 1

The total quantity of goods and services that producers in an economy are willing and able to supply at different price levels, ceteris paribus.

Question 2

AS curve shape in the short run (SRAS)

Answer 2

• In the short run (SRAS), the AS curve is upward sloping because firms are willing to supply more but only at a higher price
• this is due to:
  > rising profits - higher prices for goods and services make it more profitable for firms to increase production, (as their costs may remain fixed in the short run).
  > sticky wages - wages and other input costs do not immediately adjust to changes in the price level, so firms can earn higher profits by selling at higher prices whilst their costs remain the same
• so Higher prices can temporarily increase profit margins, leading firms to increase production.

Question 3

AS shape in the long run (LRAS)

Answer 3

• In the long run (LRAS), the AS curve is vertical at the full-employment level of output (potential GDP) because:
  > In the long run, all prices, including wages, are flexible.
  > Output is determined by factors such as technology, resources, and institutions, not by the price level.
• classical is a vertical line and keynesian has 3 phase

Question 4

What causes a movement along the AS curve?

Answer 4

• Caused by a change in the price level.

> Example: If the price level rises, we move up along the SRAS curve, indicating an increase in the quantity of goods and services supplied.

Question 5

What causes a shift in the AS curve?

Answer 5

Caused by changes in non-price level factors affecting supply.

Question 6

What does a rightward shift in the SRAS curve indicate?

Answer 6

Indicates an increase in aggregate supply
> Causes include reductions in production costs, technological advancements, or improvements in productivity.

Question 7

What does a leftward shift in the SRAS curve indicate?

Answer 7

Indicates a decrease in aggregate supply
> Causes include increases in production costs, supply shocks (e.g., natural disasters), or reduced productivity.

Question 8

Short-run AS influences

Answer 8

• Changing costs of raw materials
• Changing costs of energy (coal, oil, renewable)
• Changing exchange rates
• Changing tax rates

Question 9

What does a rightward shift in the LRAS curve indicate?

Answer 9

Reflects long-term economic growth,
> such as increased capital stock, technological progress, or an increase in the labour force.

Question 10

What does a leftward shift in the LRAS curve indicate?

Answer 10

Reflects a decrease in an economy’s productive capacity,
> such as due to destruction of capital or a decrease in the labor force.

Question 11

Long-run AS influences

Answer 11

• technological advances
• changes in relative productivity
• education and skill level in the economy
• government regulations
• demographic changes and migration
• competition policy

Question 12

Real-World Example: The COVID-19 pandemic caused a (1) shift in SRAS due to disrupted supply chains and (2) constraints.

Answer 12

1. leftward
2. labour market

Question 13

Relationship Between Short-Run AS and Long-Run AS

Answer 13

• Short-run aggregate supply is influenced by changes in the costs of production.
  > short-run refers to a time period where at least one factor of production is fixed
• Long-run aggregate supply is influenced by a change in the productive capacity of the economy
  > productive capacity of the economy is changed by changes to quantity/quality of the factors of production

> In the short run, deviations from full employment can occur, causing the SRAS to shift.
In the long run, the economy adjusts to its natural potential output level, reflected by a vertical LRAS curve.