Aggregate Supply Flashcards
What is SRAS
Short run Aggregate supply is the total quantity of goods and services supplied in the economy at any price level in the short run
Draw the SRAS curve
Why does SRAS shift upwards?
SRAS curve shifts upwards because to increase short run output, workers will have to be paid overtime pay, increasing firms costs
Draw the Keynsian LRAS
Draw the neoclassical LRAS
What is LRAS?
Long run aggregate supply shows the maximum productive potential of the economy, it is the total amount of goods and services which could be supplied in the economy in the long run
When does SRAS and LRAS shift and when is short and long run?
SRAS shifts when there are changes in price. Short run is when at least one factor of production is fixed
LRAS shifts when there are changes in productivity or quantity. Long run is when all factors of production are variable
When does a contraction or expansion of AS occur?
Contraction or expansion occurs when there is change in price level caused by factors that are not related to AS
E.g changes in AD
What do classical economist believe about LRAS?
Classical economist believe that in the long run markets will always find equilibrium (markets will clear) where there is full employment because everything will adapt to change. In the labour market a fall in demand for labour would therefore lead to a fall in the wage rate and employment as the market adjusts
LHS shows the demand and supply for the labour market. If AD falls [derived demand] demand for labour shifts from DL to DL1 and employment falls as fewer firms are willing to pay wage level [w] to workers. There is an excess supply of workers and unemployed workers will adjust their “wage expectations” to accept jobs with lower wages causing wage rate fall and employment to rise.
As more firms will pay these now lower wages for workers, SRAS shifts to the right as costs of production has fallen. This will cause output to return to it’s original value. No unemployment in the long run as markets will clear
What do Keynsian economist believe about LRAS?
Keynesians instead believe that when demand for labour falls to DL1, workers will not adjust their wage expectation and the wage rate will not change either: sticky wages. Unemployed workers will not accept lower wages and stay unemployed. Umemployment will only shrink when demand rises again
What do neoclassical economist believe about LRAS curve?
AS is vertical as it is fixed and if all resources are being used efficiently, then economy is on the PPF curve and it is not possible to produce any more goods.
If AD goes up, AS will not change in output and only in price level. The equilibrium point is always at full employment and market will always revert back to a point on LRAS with LRAS lying at natural rate of unemployment because at this point economist believe economy to be working at full employment even though some unemployment exists
What do Keynsian economist believe about LRAS curve?
Keynesian curve slopes upwards as Keynesian economist believe it is possible to have an output below full employment in the long run
Spare capacity is where economy can increase output without any cost pressured because there are unemployment resources in the economy
Bottleneck is when there are some constrains in the supply chain which cause costs pressures to build up. If AD expands when economy is at bottleneck then level of inflation will increase
Full capacity is when no more output can be created but prices will rise
