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
sras shift- factor productivity (increase explanation)
increase in productivity leads to a decrease in production costs, which in turn leads to an increase in the quantity of goods and services supplied at every price level.
sras shift- immigration
will increase the workers available so a decrease in the wage rate as so many people want to work so cost of production will drop.
sras shift- producer tax/subsides
Costs will rise and profits will fall if they get taxed. Subsides will reduce costs as gov will be paying some costs
what types of things could producers be taxed on
production, pollution, landfill
3 injections
investment expenditure
government spending
export revenue
3 leakages
savings
tax revenue
import expenditure
what is an injection
funds added to the economy from sources other than households and businesses
Extra money in circular flow of income. If higher than leakages AD rises
what is a leakage
money leaving the business-consumer cycle making it unavailable for spending on wages, goods and services
Money leaving the circular flow of income. If this higher than injections AD falls
what is the multiplier effect
Process by which any change in a component of AD results in a final greater change in real GDP
an increase in spending creates income for somebody else and so on
how do injections affect the multiplier
Injections greater than leakages that increases AD causing a positive multiplier
how do leakages affect the multiplier
Leakages greater than injections which reduce AD causing a negative multiplier
multiplier calc- receiving from the economy
1/1-mpc
multiplier calc- taking away from the economy
1/MPW (to withdraw) (mps(save)+mpt(tax)+mpm(import)
what 3 things are added to get the mpw
mps, mpt, mpm
why is savings a leakage
it lowers the demand for goods and services slowing down production
why is import expenditure a leakage
transferring income that was earned in one country to another country. The funds used to purchase the imports leave the immediate area, resulting in an outflow from the domestic area.
why is tax revenue a leakage
reduces the money available throughout the rest of the economy- that money is no longer available for spending on consumer goods or investment in factors of production.
why is investment expenditure an injection
injects income into the economy by creating new capital or replacing existing capital, encouraging more output, jobs, and income.
why is government spending an injection
provide things such as subsides, public goods, services, and infrastructure to help firms increase their production as it injects funds into the economy
why is export revenue an injection
When businesses sell products overseas, money flows from foreign buyers into the domestic economy
formula of the national income multiplier (2)
1/(1-mpc) or 1/mpw (mps+mpm+mpt)
when does the mutplier effect occur
when an initial injection into the circular flow of income causes a bigger final increase in real national income
what happens in the multiplier effect
an increase in spending creates income for someone else and so on
what is the accelerator
changes in investment that can be directly linked to changes in the rate of gdp growth
injections impact on the multiplier
injections greater than leakages that increases AD causing a positive multiplier
leakages impact on the multiplier
leakages greater than injections cause a decrease in AD causing a negative multiplier
On a Keynesian LRAS curve what does the perfectly elastic (horizontal) section imply
There is an abundance of spare capacity available in the economy
