Aggregate Supply Flashcards
Short run aggregate supply
How much output firms would be prepared to supply in the short run at any given price level at any given time period
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Why is SRAS upwards sloping?
At higher price levels it is more profitable for firms to supply so supply more to maximise profts
What causes the SRAS to shift?
Changes in costs of production
Shifts in SRAS
- Raw materials
- Wages
- Exchange rate
- Government intervention
- Protectionism
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How important are wages as a cost for firms?
Less important now as increase in technology which can replace workers
Long-Run Aggregate Supply
Output that an economy can produce when using all factors of production
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What causes the LRAS to shift?
An increase in the quantity and quality of factors on production
Where does the neo-classical school of thought believe that the economy is always operating at?
- full employment
- full capacity as all fop are fully and efficiently employed
- no supply side deficiency
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What does the neo classical school of thought LRAS curve look like?
Pefectly inelastic as cant produce anymore output as operating in full cpacity
Keynsian section of LRAS curve
- perfectly elastic as can increase AD without any changes in price level
- lots of availability in factors of production as there is spare capacity
- economy is operating inside the ppf curve
Intermediate section of LRAS curve
- resources are becoming more scarce and there’s less availability
- can still produce more as an economy but will be met with higher prices
- firms have to compete with factors or production
Neo-Classical section of LRAS curve
- perfectly inelastic as output stays the same even if output increases
- all factors of production are fully and efficiently used
- purely inflationary as the economy is at full capacity so cannot produce more to meet demand
