2.3.1 Characteristics of aggregate supply Flashcards
What is aggregate supply?
Aggregate supply (AS) is the quantity of goods and services that producers in an economy are willing and able to
supply at a given level of prices in a given time period.
What is the short run and long run?
- In economics, the short-run is the period of time in which at least one factor of production is fixed. The long-run is the period of time in which all factors of production are variable
Explain what short run aggregate supply is
Short run aggregate supply (SRAS) is the relationship between planned national output (GDP) and the general price level. A rise in the general price level should stimulate an expansion of aggregate supply as businesses respond to the profit motive. When prices are falling, production may contract. SRAS is upwards sloping i.e. a positive relationship between the price level and real GDP. The main factor causing a shift in SRAS is the factor resource cost of producing goods and services e.g. unit wage costs.
Explain what long run aggregate supply is
Long run aggregate supply (LRAS) represents the maximum possible output in an economy; it is similar to an
economy’s PPF (covered in Theme 1). It represents that maximum output when all factors of production in an economy
are fully and efficiently employed. This maximum output level is independent of the price level. The main factors
causing a shift in LRAS are a change in the total quantity/quality of the economy’s factors of production.
What do Keynesians think about short run and long run AS?
Keynesians do not tend to distinguish between short run and long aggregate supply, preferring instead to just
consider “aggregate supply” as a whole. For Keynesians, there is just one AS curve.
What do neo-classical economists think about short run and long run AS?
Neo-classical economists, however, do distinguish between the short run and the long run. Therefore, Neo-classical economists will use a short run AS curve and a long run AS curve i.e. two curves.
