Aggregate supply Flashcards
Aggregate Supply
Total amount produced in an economy.
Contraction in AS
A decrease in the price level leads to a decrease in real GDP.
Extension in AS
An increase in the price level leads to an increase in real GDP
Why does the short run aggregate supply curve slope upwards?
Increasing output increases costs in the short run and so price level increases
For example, increasing output can mean that firms need to pay workers extra for overtime. These higher costs mean that firms need to increase their prices. Remember that cost means the amount it costs to produce a product whereas the price is the selling price.
What is likely to occur for firms in an economy if the price level decreases?
As price level decreases, firms sell their products for lower prices and so revenue decreases. However, the cost of raw materials also decreases and so, overall, profit (revenue - costs) stays the same.
Spare Capacity
When the economy is producing below its maximum potential output (horizontal part of Keynesian LRAS).
Bottleneck
When the economy is nearly producing at its maximum potential output (bendy part of Keynesian LRAS).
Full Employment
When the economy is producing at its maximum potential output (vertical part of Keynesian LRAS).
What causes an SRAS curve to shift?
The SRAS will shift if there is a change in the cost of production in an economy.
What causes an LRAS curve to shift?
a change in the productivity or the quantity of the factors of production.
What would an increase in investment do to AS?
Investment in technology will increase the productivity of the factors of production. An increase in the productivity of factors of production will shift the LRAS to the right
