Aggregate Supply Flashcards
what is aggregate supply?
Aggregate supply is the volume of goods and services produced within the economy at a given price level. AS represents the ability of an economy to deliver goods and services to meet demand.
what AS indicate?
It indicates the ability of an economy to produce goods and services and shows the relationship between the real GDP and the average price levels.
what is the relationship between long run and short run AS?
Short run is the period of time when at least one factor of production is fixed and cannot be changed. On the AS curve, in the short run, money wage rates, factor prices (prices of the factor of production) and the state of technology are fixed and can’t change; a change in these results in a shift of the curve. In the long run, all factors of production are variable .
what is the main cause of a shift in SRAS?
The main cause of a shift in SRAS is a change in the cost of production, which can be caused by these three factors:
Changes in costs of raw materials and energy.
Changes in exchange rates.
Changes in tax rates.
how do changes in costs of raw materials and energy cause a shift in the SRAS curve?
an increase in costs of raw materials and energy increase costs of production so the SRAS curve will shift to the left as it will cost more to make the same amount of goods and therefore
businesses will only produce this amount of goods if prices rise. Oil prices are an important cost in determining the level of SRAS, since they affect costs for almost all
businesses
how do changes in exchange rates shift SRAS?
A weaker pound will lead to an increase in the price
of imports and this will cause SRAS to decrease as production becomes more expensive. If the pound becomes stronger, imports will be cheaper and so SRAS will increase. This is particularly important in the UK as we are heavily dependent on imports. The inflation the UK experienced after Brexit was caused by the fall in the pound, which pushed import prices up and led to cost-push inflation.
how does a change in tax rates shift SRAS?
Taxes increase the cost of production and thus they cause a fall in SRAS, shifting it to the left. Subsidies shift it the curve right as they decrease costs.
what is LRAS?
LRAS is a measure of a country’s potential output and the concept is linked to the idea of PPF;
it shows the productive potential of the economy. It shows the full capacity output i.e. where all resources are being fully utilised.
SRAS and elasticity?
Short run AS is likely to be elastic (i.e. output is relatively responsive to a change in price- it changes by a bigger percentage than price)
what does SPICED stand for?
Strong Pound Imports Cheap Exports Dear
what does LRAS on a graph represent?
vertical to represent one level of output the economy will always produce at in the long run.
what does YFE mean?
full employment level of output, represents the max level of output an economy can produce using all FOP at sustainable levels.
when the economy is at the natural rate of unemployment, thats when we are at YFE
what are the shifts of LRAS?
quantity and quality of CELL
e.g. labor productivity, investment, infrastructure, quantity of labour, competition, (if improved firms will look to decrease their costs to stay competitive), new resource discovery
