Aggregate Supply Curve (Keynesian) Flashcards
What does the Aggregate Supply Curve show?
Total quantity of goods and services all firms are willing to produce at each price level
What happens as the price level rises?
Firms are willing to produce a higher level of real output
What does YF stand for?
Full employment level of output
What is the shape of the AS curve in terms of elasticity?
More inelastic the closer the economy gets to the PPF
What is the elasticity of the AS curve at full employment level?
Perfectly inelastic
Firms can’t respond anymore in terms of supply
What is the elasticity of the AS curve at lower levels of real output (where there are plenty of spare resources)?
The AS curve is more elastic
What shape is elastic supply on the AS curve?
Flat line
What shape is inelastic supply on the AS curve?
Very upright
Why is AS perfectly inelastic at full employment level?
Everything/one is already employed
In order to get more workers you have to pay them more
What causes movements along the AS curve?
Down to changes in price level alone
What point on the PPF is elastic supply?
Below the PPF line
Not all resources being used
What point on the PPF is perfectly inelastic supply?
On the PPF line
All resources being effectively used
What factors cause a shift in AS curve?
Changes to production costs
What affects production costs?
Productivity (output per worker)
How does productivity affect production costs?
If productivity rises with wages unchanged, labour costs per unit fall
Fall in labour productivity results in LEFTward shift of AS curve
What is a shift in the AS curve the equivalent of?
PPF moving outwards
What is equilibrium?
Price level and level of real output at which planned aggregate demand is equal to planned aggregates supply
No tendency for economy’s price level or level of real output to change
What are changes in equilibrium level of income/output and price level caused by?
Shift in AD or AS curve
What does how much national income/ price level changes depend on?
How much AD/AS changes
How close economy is to full employment (elasticity of AS curve)
Whether there are counteracting changes
What is a rise in AD likely to cause?
Larger effect on price level if economy is close to full employment
What does an AD-AS diagram show?
Inflation (price level increase/decrease)
Economic Growth (real GDP increase/decrease)
Unemployment
