2.3.1 + 2.3.2 Flashcards
What is aggregate supply?
- aggregate supply is the quantity of goods and services that producers are willing and able to supply at a given price in a given time within an economy
- indicates to the ability of an economy to produce goods and services as shows the relation between real GDP and price
What happens to SRAS when GPL rises?
Should stimulate an expansion of supply as prices respond to profit motive
What happens when GPL is falling?
Production May contract
What is the main factor causing shift in SRAS?
The factor resource cost in supplying goods and services
Why is SRAS curve upward sloping?
because higher prices for goods and services make output more profitable. This enables businesses to expand their production by hiring extra labour and other resources
What happens to SRAS elasticity when an economy has lots of spare capacity
Spare capacity means there are spare factors of production
- usually when it is emerging from a recession
- then SRAS is elastic and the output gap is negative
How do changes in resource prices affect the SRAS?
a. Wage costs per unit of output e.g. arising from higher minimum wage.
b. Labour productivity
c. Key raw material and component prices such as glass, cement and rubber.
d. Energy costs such the world price of oil, gas and electricity & renewables.
How do business taxes, subsidies, regulations and imported costs affect SRAS?
a. VAT, environmental charges/ employment taxes
b. Changes in the scale and size of government subsidies to certain industries
c. Business rates + costs of meeting business regulations and other laws
External factors affecting AS
- world oil and gas prices
- energy prices/ costs
- other mineral/metal prices
- foodstuff prices
- Import tariffs/quotas
Differences between Keynesian and (neo) classical views
- Keynesians do not tend to distinguish between short run and long AS, preferring instead to just consider AS as a whole. For Keynesians, is just one AS curve.
• Neo-classical economists, however, do distinguish between the short run and the long run. Therefore, neoclassical economists will use a short run AS curve and a long run AS curve i.e. two curves.
Explanation / reasoning for the Keynesian aggregate supply curve:
When spare capacity high = elastic SRAS: a rise in AD can be met easily by increased output and there is low chance of inflation
• When SRAS is perfectly inelastic, an economy is at full capacity (equivalent to being on the PPF boundary), further increases in AD are purely inflationary in the short run with little extra real output
Elasticity of SRAS curve falls as output increases as:
- The amount of spare capacity declines
- Possibility of diminishing returns in production
- Resource shortages as the economy approaches full employment e.g. Skilled labour becomes scarce
Elastic AS curve means?
Outward shift in AD can be met without increase in GPL (non inflationary growth)
Inelastic SRAS curve means?
Outward shirt cause sharp rise in GPL as AS is inelastic - inflationary pressures
Full employments effect on AS curve?
- When the AS curve become vertical, the economy has reached full employment of factor resources.
- Full employment is defined as a state of the labour market in which everyone who is willing and able to work at the current wage rate is in employment, excluding those who are frictionally unemployed
Two separate curves for long run and short run is used by:
Neoclassical economists
SRAS shifts up or down if costs of production change
LRAS shifts left or right if the quantity/quality of factors of production change
Short run definition
Period of time where at least one factor of production is fixed and can’t be changed
How could a business increase production in the short run?
Need to increase hours/ increase productivity
- must incentivise these workers (bonuses)
- this increases the wages = increased costs
Why would businesses not necessarily want to employ additional full time, permanent staff?
Will have to commit to them (expensive) and then sack them later when they wish to cut production which could lead to a bad reputation
Why does increased supply in the short run lead to increased prices?
- business is paying more wages for every good they produce
- increased costs passed onto consumer to maintain profit margins
- rise in prices in sectors = rise in price level
Why is the SRAS curve upward sloping?
Firms are willing to supply more but only at higher prices
Why is SRAS likely to be elastic?
In the short run, output can be increased easily by paying overtime or incentivising higher productivity
- increase in output by firms leads to increase costs
- which leads to rise in prices
- increases in price are relatively small as factors of production are held constant
What happens to SRAS when demand falls due to increased prices?
- firms cut prices, BUT
- will not be able to achieve much of a reduction due to constant prices and unwillingness in short run to layoff workers
Long run definition
All factors of production are variable
Factors that shift SRAS curve?
What do you notice about these shifts?
- wage rates: increased costs of production = increased prices
- raw material/ energy prices
- taxation
- exchange rate (imported materials)
- productivity
ALL SUPPLY SIDE SHOCKS
