AD, LRAS and SRAS Flashcards
actual output
refers to the real level of economic output or production in an economy during a specific period-measured in terms of the market value of final goods and services. It provides a snapshot of the economy’s performance and is often compared to potential GDP
potential gdp
refers to the maximum sustainable level of real GDP that an economy can produce over the long term without causing inflationary pressures. It represents the economy’s productive capacity when all resources are fully utilized, including labor, capital, and technology
what factors affecting potential output (3)
labor force
capacity utilization
efficiency
factors affecting actual output (3)
fops- is it being used efficiently?
natural factors- environmental conditions
competition- can increase output
Classical approach – why is it vertical?
all factor markets will move to equilibrium in LR as prices change to make sure D=S.
There will be no markets in surplus or shortage in the LR (So in the labour market if unemployed workers exists they will realise that they have to accept pay cuts if they are to get another job.)-This happens in all factor markets as markets readjust
So in LR firms will supply the maximum potential output of the economy. So there will be no Output Gaps – positive or negative
This is true whatever the price level. Therefore, in the LRAS is vertical and is at the Yf level of output.
output gap
It is a measure of the spare capacity available in an economy.
It is the difference between the actual and potential output of the economy.
when is there a negative output
Actual Output < Potential Output (Yf) = Negative Output Gap
when is there a positive output
Actual Output > Potential Output (Yf) = Positive Output Gap
spare capacity in the economy
Exists when firms in an economy are capable of producing more output than they actually producing as there are fops available to them in the economy
what causes a negative output in the economy
The economy is under performing
what causes a positive output in the economy
Resources are being fully used or over used
supply shock meaning
AD shifting- an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply.
stagflation
inflation or higher price level at the same time of a staggered (slowed down) economy
what factors cause LRAS to shift (6)
an increase in supply of labour (immigration, high birth rates)
an increase in human capital (resulting from e.g improved healthcare, training and/or education)
increase in investment (more capital stock)
technological discovery (better quality capital stock)
discovery of raw materials
greater incentive to work (improves labour hours worked/ or productivity in LR)
what causes movement along the AD curve
change in price level
AD expands (if PL falls)
AD contracts (if PL rises)
what causes a shift in the AD curve
changes in variables that affects C+I+G+(X-M)
increase in AD shifts curve to the right
decrease in AD shifts curve to the left
disposable income
Income only minus direct tax
discretionary income
What a household has to spend after necessities are paid
what is aggregate supply
The total amount that producers in an economy are willing and able to supply at a given price level in a given time period
what does AS curve represent
Shows relationship between total quantity of goods and services supplied in an economy and the price level
what factors cause a shift in SRAS
rise in costs
raw materials
wage rates
factor productivity
immigration
producer taxes/ subsides
sras shift- rise in costs
because it increases the costs of production for all firms
sras shift- raw materials
affects the costs of production or if ability to access this it can damage supply
sras shift- wage rates
if the labour are demanding high wage rates firms may have to use their capital on dealing with this instead of spending on supply e.g more raw materials
