5. Aggregate Supply SRAS and LRAS Flashcards
What is aggregate supply
the total amount of G&S that firms in an economy are willing and able to supply at a given price level.
What is long run aggregate supply
a maximum possible output, like a country’s PPF. Maximum output when all FOP are fully and efficiently employed.
What is short run aggregate supply (SRAS)
is the relationship between planned national output(GDP) and the general price level (GPL). We assume that productivity and cost of production and the state of technology is constant in the short run
Factors causing shifts in Short run aggregate supply
Unit wage costs
Labour productivity
Indirect taxes
What are supply shocks
examples include:
steep rises in oil and gas prices
political turmoil/ civil investment
supply shut down
natural disaster
External shocks on AS
commodity prices
volatile exchange rates
Level of net migration
Import tarrifs
Labour productivity
a measure of efficiency indicated by output per person employed or value of output per hour worked.
What is infrastructure
it includes physical capital such as transport networks
Why is there and outward shift in PPF
increase in natural resourses
technological advancements
Human capital development
Investment in capital
Key causes of PPF shifting out
Higher productivity/ efficiency of factor inputs
better management of factor inputs
increase in the stock of capital and labour supply
innovation and invention of new products and resources
discovery extraction of new natural resources
Key factors influencing LRAS
changes in labour supply available
changes in the stock of capital inputs including infrastructure
changes to the stock of natural resources
changes in efficiency of allocation
improvements in the productivity
advances in state of technology
The shape of the keynesian curve
when spare capacity is high, AS will be elastic
the elasticity of the curve will decline as the country moves through an economic cycle
the amount of capacity changes and there is a possibility of diminishing returns in production
when an economy is perfectly inelastic an economy is at full capacity.
Why are LRAS classical Vertical lines
Classical economists think we should leave markets along - free markets.
Their view of LRAS is that we have a verticle AS full use of FOPs.
