Aggregate Supply Flashcards
What is Aggregate Supply?
The total supply of goods and services available to a particular market from producers
What is the shape of the SRAS curve?
Upward sloping — as price level rises, firms increase output
Why is SRAS upward sloping?
Because higher prices offset higher production costs and increase profits
What is the relationship shown in the SRAS curve?
Positive relationship between price level and national output
What does a rightward shift of SRAS mean?
Increased production at every price level (lower costs or higher efficiency)
What causes the SRAS to shift to the left?
Higher costs of production — wages, taxes, energy, raw materials
What are the main determinants of SRAS?
Wage rates, raw material prices, business taxes, productivity, exchange rates
What happens to SRAS if business taxes fall?
It shifts to the right — lower costs, increased supply
What happens to SRAS if oil prices rise?
It shifts to the left — energy costs rise, reducing supply
What does an increase in productivity do to SRAS?
Shifts it right — more output with the same inputs
What does the LRAS curve represent?
The maximum sustainable level of output at full employment.
What is the Classical view of LRAS?
It’s vertical — the economy always returns to full employment with no need for government intervention
Why is LRAS vertical in the Classical model?
Because wages and prices adjust in the long run
What is the Keynesian view of LRAS?
It’s flat at low output, becoming vertical as full employment is reached — due to wage rigidity
What is meant by ‘sticky wages’?
Wages do not adjust quickly downwards, leading to unemployment in recessions
What is the Q² cell in economics?
The quantity and quality of the 4 factors of production: land, labour, capital, enterprise
3 factors that increase LRAS
Better technology
More skilled labour
Increased capital investment
What is meant by productivity in LRAS?
Producing more output from the same input — shifts LRAS right
What is factor mobility?
The ability of labour and capital to move efficiently across industries and locations
What does a fall in National Insurance contributions do to SRAS?
Shifts it right — lower business costs
What’s one downside of cutting National Insurance?
May reduce funding for public services
What does a fall in global oil prices do to SRAS?
Shifts it right — energy becomes cheaper
What might offset the benefit of lower oil prices?
Increased use of polluting vehicles
What happens if average real wages fall by 5%?
SRAS shifts right — labour becomes cheaper
What could counteract a fall in real wages?
Reduced consumer spending, lowering demand
What happens when the cost of carbon credits rises?
SRAS shifts left — production becomes more expensive
What happens if energy prices rise by 10%?
SRAS shifts left — higher business costs
What could businesses do in response to higher gas prices?
Switch to renewable energy in the long term
What happens when semiconductor prices rise by 400%? - (raw materials)
SRAS shifts left — cost of production in tech industries increases
What happens if the UK signs a trade deal with India?
SRAS shifts right — improved access to goods and services
What’s one potential benefit of a trade deal?
New job opportunities in export industries
What happens if the pound depreciates by 6%?
SRAS shifts left — imports become more expensive
What’s one effect of reduced EU migration?
SRAS shifts left — fewer low-skilled workers, lower capacity.
What is the Natural Rate of Unemployment (NRU)?
The unemployment level from frictional and structural causes even at full employment.
What is the current NRU in the UK (approx)?
About 4%
What is reflation?
Government policy to boost demand/output after a downturn
What is an inflationary effect in AS-AD terms?
Output increases but causes prices to rise, reducing some consumers’ purchasing power
What does purchasing power refer to?
The real value of money — what you can buy with it
What does a subsidy do to the supply curve?
Shifts it right — lowers costs, increases output
Why might governments subsidise renewable energy?
It creates positive externalities — reduces pollution, benefits society.
