Aggregate supply AS – (Neo)Classical Flashcards
How are movements along the SRAS curve caused?
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 short run aggregate supply?
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
What are shifts in SRAS on the graph?
SRAS slopes upwards to the
right; as SRAS1 curve
* Any change that causes
SRAS to increase other than a
change in the PL shifts SRAS to
the right from S1 to AD3
* Any change that causes
SRAS to decrease other than a
change in the PL shifts SRAS to
the left from SRAS1 to SRAS2
What is LRAS and show it.
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).
How does a change in wage costs shift SRAS?
if firms can pay lower real wages, this reduces their
costs of production making them more willing to supply.
How does a change in productivity shift SRAS?
if labour become more productive ie more output per
labour input, this increases the efficiency and more can be supplied
How does a change in unit labour costs shift SRAS?
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.
How does a change in commodity, energy and raw material costs shift SRAS?
if the cost of buying raw
materials, energy and other commodities needed for production fall, production
costs fall and SRAS shifts right.
How does a change in education/skills shift SRAS?
improved education and training boosts skills and occupational mobility, which helps increase productivity, reducing the costs of
production and increasing SRAS.
How does a change in indirect taxes and subsidies shift SRAS?
if indirect taxes are cut and/or government
subsidies are increased, this reduces the costs of production and SRAS shifts
right.
How does a change in exchange rate shift SRAS?
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
How does a change in regulation shift SRAS?
if the government reduces the red tape and bureaucracy
for businesses, this reduces their costs and SRAS shifts right.
