Characteristics of aggregate supply Flashcards
What does the SRAS curve show?
Shows the relationship between the supply of firms and the price level in the short run. It shows how much output firms are willing to supply at different price levels when the money wage rate and other factors remain fixed (or constant).
What are the assumptions behind the SRAS curve?
1) Assumes there are fixed input prices as it is assumed in the short run that raw materials and wage levels remain constant as wage rates in most firms are fixed for a year.
2) Assumes there is fixed productivity behind workers as productivity can only be changed in the long run by investment in training.
3) Assumes there are fixed level of technology as technology can only be varied in the long run by investment in research and development of new processes and goods.
What is input prices?
Input prices are the prices paid by firms to the suppliers of the factors of production which are used to manufacture goods or service. It usually means ‘prices’ (or cost) of the raw materials and wages used to provide the goods and services.
What are variable factors in the short run?
1) The prices firms charge customers.
2) The output of the goods and services they make.
How can firms change the level of output?
They can increase the numbers of workers to increase output or decrease the numbers of workers to decrease output this causes a movement along the curve.
What will happen to the economy if firms increase price levels?
This means on the curve P1 will move up to P2 as the average price of the goods have increased. As this happens the prices of the goods and services have risen, businesses will increase the output of the goods and services they make (while the wages and raw material costs stay constant). This is because the profit per unit for each good or service will increase.
What will happen to the economy if firms decrease price levels.?
On the graph the price level has fallen from P1 to P2 as firms have decreased average price level of the product. As the prices of goods and services have fallen businesses will decrease their level of output of the goods and services they make ( while the wages and raw material costs stay constant). This is because the profit per unit for each good or service will decrease.
What does change in price level do to SRAS curve?
Causes a movement along the curve.
