Aggregate Supply Flashcards
aggregate supply
is the total output that producers in an economy are willing and able to supply at a give price level in a given time period
what does the keynesian AS curve assume?
that in a deep recession prices and wages are fixed (strictly)
How many types of AS curves are there?
2
The Keynesian LRAS curve
Is L-shaped
What is the short-run aggregate supply curve?
A curve showing how much more output firms would be prepared to supply in the short run at any given overall price level
What is the short-run
A period where the costs of resources (e.g. wages) are fixed
Why is the SRAS curve upward sloping
If prices of output rise and costs of
production are fixed - firms will make more profit and therefore supply more
What is the primary factor that leads to a shift in SR aggregate supply
Costs of production faces by firms
Factors which affect costs of production
Resource costs
Exchange rates
Government intervention
How does an increase in the cost of inputs affect AS?
An increase in costs of inputs - increase in costs of production = decrease revenue, decreasing supply
How does the exchange rate affect AS?
Depreciation in the £ = increase costs in £s when purchasing goods abroad = increase in COP = decrease in AS
How does government intervention affect AS?
Government intervention usually leads to a decrease in AS e.g. new health legislation = increase in COP = decrease in AS
What is the multiplier effect?
The multiplier effect refers to the increase in expenditure, leads to the further successive rounds of additional expenditure
Name 3 factors that reduce the multiplier effect?
Savings
Tax
Imports
What is MPS?
Marginal Propensity to Save - what % of income is saved?
What is MPT?
Marginal Propensity to Tax - what % of income is taxed?
What is MPM?
Marginal Propensity to Import - what % of extra income is spent on imports
Why is MPW?
Marginal Propensity to Withdraw
How to calculate MPW
MPS+MPT+MPM
The final increase will depend on the value of the multiplier (k) where K =
K = 1/MPW
What causes shifts of AS in the long run
LRAS can shift if the economy’s productivity changes, either through an increase in the quantity of scarce resources, such as inward migration or organic population growth, or improvements in the quality of resources, such as through better education and training.
Define productivity?
the efficiency of production of goods or services expressed by some measure
