AS Flashcards
Definition of AS
The amount all firms are willing to supply at various price levels
Short run AS: change in cost of raw materials
If cost of oil rises, the cost of producing almost everything will rise, meaning that aggregate supply decreases (shift left)
Short run AS: changes in level of international trade
If, for example, trade is inhibited by a new tax import (tariff), cost for domestic firms tend to rise as they cannot enjoy low production costs using cheap raw materials, and AS decreases
Short run AS: changes in exchange rate
If pound gets stronger, imports become cheaper and AS increases
Short run AS: change in tax rates
If cut in indirect tax such as VAT, there would be a AS increase
Long run AS: technological advances
New computer aided technology, for example, reduce costs for a broad range of firms
Long run AS: relative productivity changes
If there’s an improvement in the division and workflow becomes more efficient, then AS will shift right
Long run AS: demographic changes and migration
Demographic changes have direct effects on the supply, skills and costs of labour, and therefore impact on AS as a whole. Migration has a specific demographic effects on that many migrant are of working age or students, so increases in migration in the short run causes AS to increase, but if migrants stay in the country and have children and become more dependent in their old age, the effect on AS might be stagnate
Long run AS: competition and regulation changes
If firms force to compete rather than act like monopolies, they have to cut prices or improve their quality. Effective policing of competition makes the AS increase. If the government makes new laws to make it easier to set up and run businesses then AS increases. This is sometimes called a cut in red tape. Some regulations may add to firms costs (decrease AS)
Long run AS: changes in minimum wage
Increases in the min. Wage can increase costs for firms, so AS falls. However, there is evidence that increasing min. Wage can increase productivity of workers, so increase AS
Long run AS: changes in tax and benefit system
A cut in taxes on firms might increase AS, a cut in benefits might make people more desperate to keep their jobs or find work, meaning productivity increases- although it may mean people are less healthy, or less able to concentrate, or cause living standards to decrease
