2.3.1 The characteristics of AS Flashcards
Aggregate supply
Aggregate supply is the total output of goods and services that firms in an economy are willing and able to supply at a given price level .
Long run aggregate supply
Long run aggregate supply represents a maximum output when all factors of production are fully and efficiently employed .
Short run aggregate supply ( SRAS )
Short run aggregate supply ( SRAS ) is the relationship between planned national output ( GDP ) and the general price level ( GPL ) .
What do we assume when drawing an SRAS curve?
We assume that productivity and costs of production and the state of technology is constant in the short run when drawing the SRAS curve
Why is the SRAS curve upward sloping?
- Limited flexibility in inputs: Firms rely on measures like overtime to increase output, only doing so if prices rise to cover higher costs, leading to an upward-sloping aggregate supply curve.
- Increased labor costs: Higher marginal labor costs from overtime or temporary workers are passed on to consumers, causing the aggregate supply curve to slope upward.
- Rising production costs: As output increases, rising production costs lead firms to raise prices, resulting in an upward-sloping aggregate supply curve.
- Aggregate supply as the sum of individual supply curves: The aggregate supply curve combines individual upward-sloping supply curves, reflecting higher prices as output increases.
What is the difference between movements along and shifts of the AS curve?
Whenever there is a change in the general price level ( GPL ) in an economy , there is a movement along the short run aggregate supply ( SRAS ) curve . Whenever there is a change in the conditions of supply in an economy (e.g. costs of production), there is a shift of the entire SRAS curve.
What leads to an expansion of SRAS?
A rise in the general price level usually stimulates an expansion of short - run aggregate supply as producers respond to higher demand and prices .
What leads to a contraction of SRAS?
A fall in the general price level usually leads to a contraction of short - run aggregate supply as producers cut back production if demand and prices are falling .
What leads to an outward shift of the SRAS curve?
A decrease in costs for firms causes an outward Shift of the SRAS curve
What leads to an inward shift of the SRAS curve?
An increase in costs for firms causes an inward Shift of the SRAS curve
How are short run and long run AS different?
Short run aggregate supply ( SRAS ) is influenced by changes in the costs of production. Short run refers the time period where at least one factor of production is fixed.
Long run aggregate supply ( LRAS ) - all factors of production are variable. LRAS is influenced by a change in the productive capacity of the economy.
What is fixed in short run AS?
money wage rates, factor prices ( prices of the factor of production ) and the state of technology
How is productive capacity changed and what is changing production capacity equivalent to?
Productive capacity is changed by changes to the quantity or quality of the factors of production. When production capacity changes , it is equivalent to a shift inwards / outwards of the production possibilities frontier ( PPF ).
