2.3.2 Short run aggregate supply (SRAS) Flashcards
Why is the short run AS curve upwards sloping?
The short run AS curve is upward sloping because higher prices for goods and services make output more profitable and enable businesses to expand production by hiring extra labour and other resources. A fall in the price level causes a contraction of aggregate supply.
What happens when a business is not making full use of its available capacity?
There are spare factors of production including land,
labour and capital. When an economy has plenty of spare capacity, short run aggregate supply is elastic.
What happens when production costs rise/fall?
If production costs rise, then SRAS will shift inwards i.e. decrease. If production costs fall, then SRAS will shift outwards i.e. increase.
What are the reasons for costs changing?
- Changes in resource input prices
- Business taxes, subsidies, and regulation and imported costs
- Cost of imported components (affected by the exchange rate + fluctuations in global commodity prices)
- Unexpected Supply Shocks that affect the price of raw materials
What are resources whose prices can change and therefore affect costs?
a. Wage costs per unit of output e.g. arising from higher living wage
b. Labour productivity (higher efficiency ceteris paribus lowers unit costs)
c. Key raw material and component prices such as glass, cement and rubber
d. Energy costs such as the world price of oil, gas and electricity & renewables
What are the business taxes, subsidies, regulations and imported costs that can change costs?
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
How can the cost of imported components affect costs?
If the exchange rate weakens, then imports will become more expensive, causing the price of
imported raw materials and components to rise
What are unexpected supply shocks that affect the price of raw materials?
E.g. A hurricane, a tsunami or the effects of drought, flooding or a political crisis / civil war
What is the impact of changing VAT rates on the economy?
A change in the rate of VAT affects the SRAS curve – not the AD or the LRAS curve.
What does a fall in short run AS look like?
What does an outward shift in SRAS look like?
This outward shift in the aggregate supply curve might have been caused by a fall in labour costs, or perhaps a decline in energy costs.
What are external factors affecting Aggregate Supply?
- World oil and gas prices - The UK is a net importer of oil – an input used in many different industries
Energy prices / costs - The UK is also a net importer of energy source such as coal - Other mineral / metal prices - E.g. Rubber, iron ore, rare earths (used in many electronic products)
- Foodstuff prices - E.g. International prices for fresh foods, coffee, wheat, cocoa, sugar
- Import tariffs / quotas - The UK may face tariffs on imports from the EU depending on the terms of Brexit negotiations
