Aggregate Supply Flashcards
What is the Short Run Aggregate Supply?
Short run aggregate supply SRAS: total planned output when the general
price level can change but the prices and productivity of factor inputs are
held constant.
In the short run, the SRAS curve is assumed to be upward sloping.
Movements along the SRAS Curve: a change in the price level brought
about by a shift in AD results in a movement along the short run AS curve.
If AD rises, there is an extension of SRAS; if AD falls there is a contraction
of SRAS.
What is the Long Run Aggregate Supply?
Long run aggregate supply LRAS: total planned
output when both prices and average wage
rates can change – it is a measure of
a country’s potential output and the concept is
linked to the production possibility frontier
• In the long run, the LRAS curve is assumed
to be vertical (i.e. it does not change when
the general price level changes)
What are some factors that shift SRAS?
Changes in wage costs: if firms can pay lower real wages, this reduces their costs of production making them more willing to supply.
Changes in productivity: if labour become more productive – more output per labour input, this increases the efficiency and more can be supplied.
Changes in unit labour costs: Unit labour costs = labour cost per unit of output. If wages fall relative to productivity growth, then ULCs fall,
reducing costs to businesses, so they will be prepared to supply more.
Changes in commodity, energy and raw material costs: if the cost of buying raw materials, energy and other commodities needed for production fall, production costs fall and SRAS shifts right.
Changes in education/skills: improved education and training boosts skills and occupational mobility, which helps increase productivity, reducing the costs of
production and increasing SRAS.
Changes in indirect taxes & subsidies: if indirect taxes are cut and/or government subsidies are increased, this reduces the costs of production and SRAS shifts right.
Changes in the exchange rate: an appreciation decreases import prices; if a country is a net importer of energy, raw materials and components, this decreases the costs for many businesses and SRAS shifts right.
Changes in regulation: if the government reduces the red tape and bureaucracy for businesses, this reduces their costs and SRAS shifts right.
NB: reverse the chains of reasoning for all factors for decreasing SRAS
Factors that shift the LRAS Curve?
The LRAS represents the economy’s productive potential, i.e. its maximum output given its resources. LRAS is located at the economy’s full employment
level of output. There is no spare capacity.
It shifts when there is:
• Change in the quantity of resources (land, labour, capital & enterprise)
• Change in the quality of resources
• Technological progress
What is the Classical view?
Classical economists believe in the self-adjusting nature of markets, where wages and prices are flexible, and the economy naturally tends toward full employment.
They argue that government intervention is often counterproductive.
What is the Keynesian view?
Keynesian economists emphasise the role of aggregate demand and argue that markets may not always self-adjust efficiently, especially during recessions.
They advocate for government intervention, such as fiscal policies, to manage demand and stabilise the economy.
