Aggregate Supply

Question 1

Aggregate supply

Answer 1

total supply of goods and services in an economy

Question 2

Short Run AS

Answer 2

defined as the period of time when prices of factors and production do NOT CHANGE - price of labour is fixed

Change in factors other than price will lead to the entire curve shifting (supply side shocks)

Question 3

Factors that may change position of SRAS

(factors that lead to change in production costs)

Answer 3

Change in wage rates -> increased production costs -> decrease in AS

Change in primary commodity costs -> increased cost of production -> decreased AS

Change in tariffs -> if capital used is imported and tariffs increase -> cost of production increase -> decrease in AS

Question 4

Long Run AS

(neoclassical definition of LRAS)

Answer 4

minimal govt intervention so LRAS is perfectly inelastic (vertical) - same demand at any price level

LRAS curve depicts what economy operating at full capacity/efficiency looks like

Price levels do not affect LRAS -> only factors of production (eg: labor)

Question 5

Keynesian AS

Answer 5

Has three different stages and does not distinguish between LR and SR

P1) perfectly elastic at low levels of economy activity - producers can produce more without increasing average costs due to extra unused FoP

P2) as FoP get used up and economy moves towards full capacity, producers costs will increase as they compete with scarce FoP -> increase in average price level for consumers

P3) economy reaches full capacity and it is impossible to increase output because all FoP are employed -> AS perfectly inelastic

Question 6

Shifting the LRAS and AS Curves

Answer 6

outward shifts means productive capability has increased (similar to outwards shift of PPC)

eg: increase in full employment level

decrease in quantity or quality of FoP has opposite effects