AS ( Simple ) Flashcards
What are the main determinants of SRAS?
The cost of employment might change, e.g. wages, taxes, and labour
productivity. If costs increase, supply will shift inwards from SRAS1 to
SRAS3.
- The cost of other inputs e.g. raw materials, commodity prices, and the
exchange rate if products are imported. A stronger currency reduces
the price of imports, so imported products will be cheaper. This would
shift the AS curve outwards, from SRAS1 to SRAS2.
- Government regulation or intervention, such as environmental laws
or green taxes and business regulation. Business regulation is
sometimes called ‘red tape’.
- There could be a net outward migration of workers, which causes a
‘brain drain’ on the domestic economy, as skilled workers move
elsewhere.
- If there is a fall in business capital spending, supply will fall
What factors influence LRAS?
The LRAS curve is influenced by changes which affect the quantity or quality of the
factors of production. This is equivalent to shifting the PPF curve i.e. when the
economy is operating at full capacity
What are some examples of factors that change the quality or quantities of factors of production?
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition Policy
How do technological advances affect LRAS?
- Investment that leads to advances in technology will lead to to more efficient production and will increase maximum output.
- The economy can produce goods in larger volumes or improve the quality of goods and services produced
How do changes in relative productivity affect LRAS?
• A more productive labour and capital input will produce a larger quantity of output with the same quantity of input
How does a change in education & skills affect LRAS?
Better education and training should lead to more productive individuals, the output per person will increase, so max output is increased.
How do demographic changes/migration affect LRAS?
Skilled workers migrating to a country can increase the countries productive capacity
How does competition policy affect LRAS?
A more competitive market encourages firms to more efficient and productive, as inefficient firms will close and be replaced by more efficient firms, governments can use competition policy to stimulate this in an economy
What does the vertical shape of the LRAS curve assume?
Economy is operating at full employment
What happens at low level of output?
- AS is completely elastic, horizontal.
* There is spare capacity in the economy, so output can increase without a rise in the price level.
What does the curve sloping upwards mean?
The economy is experiencing problems with supply, which are causing increases in costs.
What happens when the curve is vertical?
The economy is at full capacity, at this point AS is completely inelastic. All resources are being used to their maximum potential and output cannot increase further.
What does it mean if the price is above equilibrium?
Excess supply
What does it mean if the price is below equilibrium?
Excess AD
What happens if the economy becomes more productive?
Supply shifts to the right, lowers price level and increases NO.
