Aggregate Supply Flashcards
aggregate supply
the total amount of goods and services the whole economy can supply at every given price level
2 different aggregate supplies
- classical
- keynesian
classical aggregate supply 2 parts
- short run
- long run
short run definition
a period of time where all factor prices are fixed
short run aggregate supply curve
the total supply of goods and services at any given price level over a given period of time at a given wage rate
Variable output
Production can exceed productive capacity for short periods of time
causes real output to increase
when does variable output occur
when the economy is operating at a level that is close to the productive capacity for the economy
what are the effects of short run AS on curve
- price increases
- real output increases
Why does price increase in short run AS
production costs rise when Qs rises, so pay more overtime for workers…
- difficult and costly to engage external factors
Why does price increase in short run AS
- labour works more intensely - like overtime
- difficult and costly to engage additional factors (produce more)
- higher costs will lead to higher prices
- price increases less than real output
Why is SRAS curve slope upwards
this is because price and real output are direct and have a positive relationship
outward shift in SRAS curve
decrease in costs, causes AS shift to the right,
- real output stays the same
- price decreases
inward shift caused in SRAS curve
increase in costs causes AS shift to the left
- real output stays the same
- price level decreases
how are the changes in costs caused
- wage rates
- raw material price
- exchange rates
- indirect taxes / subsidy
how does exchange rates effect costs
stronger pound, imports cheaper, shift right
weaker pound, imports dearer, shift left
supply side shock
A sudden, unexpected and significant change in the costs of factors of production
long run AS definition
there is a limit to how much output can be produced
factors of long run AS
- cannot exceed capacity for a long time
- capacity doesnt depend on cost / price
- LRAS is perfectly inelastic as its independent of price
why is LRAS perfectly straight / inelastic
because real output cannot be exceeded so cannot change
only price can go up or down
full employment
the level of output where all available factors of production are engaged in the productive process
what is full employment labeled as on the x axis
Yfe - on x axis for real output
how can we show inactive resources using full employment
- FE represents maximum capacity
- but some resources won’t be catagorised as unemployed
- mean they are capable but not willing
= inactive resource
2 examples of inactive resources
A factory no longer in use
- A person choosing to not work, because they don’t need the money
Long run shifts
A change in the productive potential of an economy due to a change in the quantity and / or quality of a factor of production
LRAS shift left
caused by a decrease in either the quality or quantity of a factor of production
LRAS shift right
caused by an increase in the quality or quantity of a factor of production
LRAS shifts on ppf
can use ppf to show increase in productive capacity by shifting outwards on a ppf
Quantity and Quality of land
LRAS shifts
quantity:
- discover new resources
- land reclamation
- extend land
quality:
- irrigation
- flood defense
quality and quantity of labour
LRAS shifts
quantity:
- Birth rates
- higher retirement age
- immigration / emmigration
quality:
- Education
- Training
quality and quantity of capital
LRAS shifts
quantity:
- increased investment
quality:
- technological advancements
quality and quantity of immigration
LRAS shifts
quantity:
- immigration
quality:
- training and support
how and who invented the Keynesian AS curve
created by John Maynard-Keynes
because forces failed to correct the great depression of 1920s/1930s
Keynesian AS curve LR/SR?
doesn’t have them
costs changes and change in quality and quantity effect the AS curve the same
Keynesian AS curve 3 stages
- elastic c
- intermediate
- inelastic
what is the keynesian elastic c phase
very low output
- resistance of wages falling to any lower level
means there will be no further price changes as output drops
what is Keynesian intermediate phase
output is starting to recover
curve is transforming from elastic to inelastic because getting closer to full employment level
what is Keynesian inelastic phase
reaches full employment level
what the changes of market equilibrium might be and the policy implications might be
what causes Keynesian AS curve to shift
A change in anything other than the price level will lead to a shift in the entire AS curve
issues with classical AS curve
- Wage stickiness
- inconsistent outcomes
issues with classical AS curve
whe - Wage stickiness
- inconsistent outcomes
when to use both theories
- neither is right or wrong
- focus more on classical
- use Keynesian to evaluate answers
negative output gap
below the Full Employment level of output
No output gap
At the full employment level of output
positive output gap
above the full employment level of output
in short run equilibrium
SRAS curve = AD curve
SRAS temporary equilibrium
All economies must move back towards the LRAS curve
LRAS equilibrium
SRAS = AD curve = LRAS curve
LRAS equilibrium what happens to output gap
Output gap closes in the LR
SR Equilibrium negative output gap
Either:
- AD shifts right
- SRAS shifts right
-> needs to happen to meet full employment and close the negative output gap
SR equilibrium positive output gap
Either:
-AD shifts left
-SRAS shifts left
happens to return to full employment and closes positive output gap
relationship between real output and employment
positive relationship
why is the relationship between real output and employment positive
because of the derived demand for labour
relationship between real output and unemployment
negative relationship
