Aggregate Supply Flashcards
Why does the SRAS curve slope upwards?
In the SR, firms don’t want to vary their inputs. (eg. employ more staff). They instead pay staff overtime, increasing CoP and therefore prices.
Why is SRAS considered relatively elastic?
In the SR, firms won’t need to change prices drastically if they are not changing their number of workers.
But they can still achieve large changes in output without changing the price level too much.
Describe the 3 factors affecting SRAS
Changing costs of production - eg. variation in wages, energy costs & raw materials.
Exchange rates - if the £ of imported materials changes, this can affect costs. SPICED.
Taxation/ Subsidies - if taxes (eg. cooperation tax), increases costs. Subsidies reduce costs.
What does the Classical LRAS assume?
It assumes the economy always produces at full capacity as wages self adjust to make sure this is the case.
How do wages self adjust to keep the economy at full capacity according to the Classical LRAS?
If AD increases, costs increase (staff work overtime) and SRAS shifts up. But as this can’t be sustained in the long run, prices go up again as the economy returns to full capacity.
If AD falls, firms reduce output and prices fall. But as there is spare capacity, firms can increase o/p at low costs. So when the economy returns to full capacity, prices are lower.
What do Keynesian economists assume about the LRAS?
They believe in the LR, wages and other FoP prices are sticky downwards. Due to minimum wages and reluctance to do so by firms - wages don’t fall much.
They suggest it can take 20-30 years to recover from shocks like the great depression.
What is the difference between a shift in SRAS and LRAS?
SRAS shift when there is a change in cost of production.
LRAS shift when there is a change in productive capacity of the economy. (change in quality/ quantity of FoPs)
What are 5 ways in which the quality/ quantity of FoPs can be improved?
Technology advances/ enterprise Education/ training Government regulation Demographic changes/ migration Factor mobility/ productivity
How can demand-pull inflation be shown on an AD/AS diagram?
Outward shift in AD at full capacity, price level increases. (Keynesian LRAS)
How can cost-push inflation be shown on an AD/AS diagram?
Inward shift of SRAS, output falls and price level increases. (SRAS diagram)
How can short-run and long-run economic growth be shown on an AD/AS diagram?
SR - Outward shift in AD, not at full capacity, output increases.
LR - Outward shift in LRAS, full capacity output increases.
(both on Keynesian LRAS)
How can investment/ improving productivity be shown on an AD/AS diagram?
Investment shifts AD outwards as it increases output and employment.
Also shifts LRAS outwards if investment is in new tech that improves productive potential.
(Keynesian LRAS)
How can an appreciation of the exchange rate be shown on an AD/AS diagram?
Appreciation - SPICED, AD shifts inwards, but SRAS shifts outwards as cost to produce domestic goods falls. (imports cheaper)
Depreciation - AD increases as exports cheaper. SRAS shifts inwards as imports are expensive, costs for domestic firms increase.
(SRAS diagram)
How can an increase in immigration be shown on an AD/AS diagram?
Outward shift of LRAS as quantity of labor increases. This increases the productive potential of the economy.
How can a negative output gap be shown on a Keynesian LRAS diagram?
Draw the AD curve below full capacity. The output between Y1 and Y FE is the negative output gap.
