Aggregate Supply Flashcards
What is aggregate supply?
Aggregate supply is the total supply of goods and services in the economy at a given price level.
Why is the SRAS relatively price elastic?
The SRAS is relatively price elastic because, given constant wages and prices for factors of production, the increases in costs when expanidng production will likely be small. Similarly, if demand falls, the decrease in prices will be small as average and marginal costs will only decrease a little. !!
What factors could shift the SRAS curve?
Wage rates, Raw material prices, Taxation, Exchange rates, Productivity.
What is the LRAS?
The LRAS is the maximum amount of goods and services that can be produced over a period of time with a given level of factors inputs. The LRAS shows the productive potential of the economy.
Why is the LRAS vertical?
The LRAS is vertical because, in the long run, there is a limit to how much supply can increase as there is a fixed amount of labour, capital and land in the ecnonomy. Therefore, in the long run, the aggregate supply is fixed at a given level of real output irrespective of the price level. It is based on the idea that markets correct themselves quickly, hence, in the long run, all markets will in equilibrium and there will be no unemployed resources.
What factors could shift the LRAS curve?
Technological advances, Relative productivity, Education, Government regulations, Demographic changes, Competition policy, Enterprise, Factor mobility, Economic incentives
Why is the Keynesian LRAS different from the classical LRAS?
Keynesian economists point out that sometimes markets do not clear for very long periods of time, hence the Keynesian LRAS curve allows for the possibility that the economy may not be at its productive potential even in the long run. Even when the economy is well below the productive potential and there is mass unemployment, there is a floor below which the price level will not fall. This is because wages are sticky downwards, perhaps due to minimum wages or trade unions or because wage cuts could lead to lower motivation and productivity.
