2.3.2 short run aggregate supply Flashcards
what is short run aggregate supply
short run aggregate supply is the period of time when at least one factor of production is fixed. In the short run money wage rates, fator prices (prices of FoP) and state of technology are all fixed and cannot be changed, if any of these change then the curve will shift
on the SRAS , what must producers do to increase production?what may they not do and why?
how will this affect average and marginal labour costs per good produced?
who will this affect consumers?
how does this determine the shape of the SRAS?
-on the SRAS, to increase production producers must make workers work more hours, potentially through overtime, this may be incentivised by bonuses or higher wages per hour. Firms may not employ new full-time,permanent staff, this is because they would be sommitted to them and may potentially have to sack them if sales fall
-this increases average and marginal costs per good produced
-this increase in costs of production is passed onto the consumer, increasing consumer prices
-therefore making the curve upward sloping as firms are willing to supply more but only at a higher price
what does a shift in AS mean, what causes this?
what caues a movement along the AS curve?
-a shift in AS means that the total output producers are willing and able to supply changes at any given price level, it si caused by a change in costs of production
-a movement along the AS curve is caused by a change in price level
what is the difference between SRAS and LRAS (factors of production)
-the short run is the period of time when at least one factor of production is fixed and cannot be changed. On the AS curve, in the short run, money wage rates, factor prices (prices fo FoP) and the state of technology are fixed and cant be changed, if these change there is a shift in the curve.
-In the long run, all factors of production are variable and can change
what is the main cause of a shift in SRAS?
what are the 6 factors which cause the change in costs of production
why might supply side shocks occur?
-the main cause of a shift in the SRAS is a change in the costs of production
-wage costs: an increase in the NMW from £10.42 to £11.44, will increase firms costs as they there is a 9.8% increase in wages per hour. This is likely to increase costs of production, causing SRAS to shift to the left, may be passed on to consumers via higher prices.
-raw material costs: an raw materials costs increase, firms will see an increase in their costs of production, causing SRAS to decrease and shift left. price of oil plays a key role in costs of production, a change in this will chage costs of production.
-tax and subsidies: indirect taxes are a levy placed on goods/services,e.g VAT. An increase in indirect taxes will increase costs of prodcuton, causing SRAS to decrease. A subsidy is a government grant given to business to lower costs of production, this causes SRAS to increase and shift to the right.
-Labour productivity: productivity is output per worker,in a given time period. investment in machinery will increase output per person and costs per unit will fall, decreasing costs of production, causing SRAS to shift to the right.
-changes in the exchange rate: the exchange rate is the value of one currency in terms of another. A stronger exchange rate (appreciation/reevaluation) will make imports cheaper, decreasing costs of production, causing SRAS to increase and shift to the right.
-Impact of immigration: immigration is people coming into the country. an increase in immigration would put downward pressure on wages as there is a larger pool of workers to employ, this lowers the costs of production as firms are able to employ workers at lower wages, increasing SRAS, causing it to shift to the right.
-supply side shocks may occur when there are significant changes to any of the 6 factors mentioned above.
