2.3.1 Characteristics of Aggregate Supply

Question 1

Aggregate Supply (AS)

Answer 1

The total output firms in an economy are willing and able to produce at a given price level over a given period of time.

Question 2

Two types of Aggregate Supply

Answer 2

• Short Run Aggregate Supply (SRAS)
• Long Run Aggregate Supply (LRAS)

Question 3

What is SRAS influenced by?

Answer 3

Changes in the costs of production or productivity.

Question 4

What does the term ‘short run’ refer to?

Answer 4

Short run refers to the time period where at least one factor of production is fixed.

Question 5

What is LRAS influenced by?

Answer 5

Changes in the productive capacity of the economy.

Question 6

What affects productive capacity?

Answer 6

Changes in the quantity or quality of the factors of production.

• When production capacity changes, it is equivalent to a shift inwards/outwards of the PPF.

Question 7

Short Run Aggregate Supply (SRAS) Curve

Answer 7

The SRAS curve slopes up from left to right because as real output increases, firms have to spend more to increase production. Increased costs result in higher average prices.

SRAS curves show that with an increase in the price level, there’s an increase in the amount of output firms are willing to supply.

Question 8

How does the SRAS curve differ if it is elastic or inelastic?

Answer 8

• If the SRAS is price inelastic, the SRAS curve slopes steeply upwards.
• If the SRAS is price elastic, the SRAS curve would be less steep.

Question 9

What does the Long Run Aggregate Supply (LRAS) Curve show?

Answer 9

The LRAS curve shows that an economy will move towards an equilibrium where all resources are being used to full capacity (so the economy is running at its full productive potential).

Question 10

The LRAS curve is vertical. What does this mean?

Answer 10

An increase in the price level won’t cause an increase in output (because the economy is running at full capacity and therefore cannot create any more output).

Question 11

Movement along the SRAS curve

Answer 11

Whenever there is a change in the price level in an economy, there is a movement along the SRAS curve.

Question 12

How will an increase in price affect the SRAS curve?

Answer 12

An increase in the price level from P1 to P2 leads to a movement along the SRAS curve from A to B.

There is an expansion of real national output from Y1 to Y2.

Question 13

How will a decrease in price affect the SRAS curve?

Answer 13

A decrease in the price level from P1 to P3 leads to a movement along the SRAS curve from A to C.

There is a contraction of real national output from Y1 to Y3.

Question 14

Shift along the SRAS curve

Answer 14

Whenever there is a change in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve.

Question 15

How will a decrease in the costs of production affect the SRAS curve?

Answer 15

A decrease in the costs of production or increase in productivity results in a shift right of the entire curve from SRAS1 to SRAS2.

At every price level, output and real national output has increased from Y1 to Y2.

Question 16

How will an increase in the costs of production affect the SRAS curve?

Answer 16

An increase in the costs of production or decrease in productivity results in a shift left of the entire curve from SRAS1 to SRAS3.

At every price level, output and real national output has decreased from Y1 to Y3.

Answer 18

• steep rise in price of oil and gad
• political turmoil
• supply shut-downs caused by punlic health crisis e.g covid
• natural distorters causing a sharp fall in production
• unexpected breakthrough In production.