Aggregate Supply Flashcards
What is the definition of aggregate supply?
Total amount of goods and services that all firms in the economy are willing to supply at a given price level in an economy in a year.
What does the short run aggregate supply curve mean?
As its upward sloping from left to right, indicating that when the price level increases, firms in the economy as a whole are willing to supply more.
A rise in the price level from PL1 to PL2 leads to a rise in real output from Y1 to Y2.
What causes a shift in the AS curve?
If the costs of production rise, the AS curve shifts to the left. This could be caused by an increase in oil prices causing a rise in the production costs of firms.
If costs of production fall then AS curve shifts to the right. This could be caused by a fall in raw material prices.
What are the factors influencing short run aggregate supply?
Changes in cost of raw materials- if cost of electricity rises, the cost of production of almost everything rises, AS decreases which is shown by curve shifting to the left.
Changes in exchange rates- if exchange rate of the point increases in value against other currencies than imports become cheaper and LRAS increases
Changes in tax- if corporation tax increases, increases cost of production of all firms in an economy by taking a larger chunk out of profits reducing profit margins
.
What is an example of a graph for a rise in the cost of raw materials
What is an example of a graph with a fall in VAT?
What is assumed In the short run?
In the short run, capital is fixed. This is because firms would not be able to build a factory in the short run. Therefore in the short run it is assumed that at least one factor of production would be fixed, but firms can alter other factors of production eg. Labour.
What is Long run aggregate supply?
LRAS is a concept which refers to the output that an economy can produce when USING ALL ITS FACTORS OF PRODUCTION, therefore when operating at full employment. LRAS shows the level of production that an economy is capable of producing if all factors of production are used to their full potential.
What factors affect LRAS?
If there is an increase in the quantity of quality of factors of production, this can increase the productive capacity therefore LRAS will be shifted right.
If there is a decrease in the quantity or quality of factors of production, this can decrease productive capacity, therefore LRAS would be shifted left.
What is an example of a graph where there is a rise in immigration
What are specific factors affecting long run aggregate supply?
Quantity or quality of capital- If the quantity of capital increases due to an increase in net investment (which could be caused by any of its determinants), for example, this will lead to an increase in the capital stock. A larger capital stock will increase the productive potential of the economy (more capital goods that can be used to increase output) and so cause LRAS to increase. If the quality of capital increased (via improved technology) as a result of increased spending by firms or the government on R&D, for example, this would also increase the productive potential of the economy (it would likely increase capital productivity, meaning that more goods and services could be produced in the same time period), and so also cause LRAS to increase
Quantity or quality of labour- The quantity of labour (specifically, people in the labour force) could increase due to higher immigration, higher retirement age (meaning that more people would be obliged to work before they could retire and live off of a pension) or more women (who may have been looking after their home) deciding to enter the labour force. This would increase the productive potential of the economy (more labour to create goods and services) causing LRAS to increase. The quality of labour could be improved by increased government spending on education and training, for example. This would also increase the productive potential of the economy (increased human capital would increase labour productivity, meaning that more goods and services could be produced in the same time period) and so also cause LRAS to increase
Technological advances-
Education and skill changes- more people are wel educated increases LRAS
Changes in government regulations- LRAS may shift left if it causes a reduction in the productive potential of the economy.
Changes in minimum wage- if they increase SRAS decreases, however increasing minimum wage increases productivity of workers which mean LRAS increases.
