LS4 AS Flashcards
Why is the macroeconomic supply curve called the aggregate supply curve?
It is the sum of all the industry supply curves in the economy and shows how much output firms wish to supply at each level of prices
In reference to the short run aggregate supply curve what is the short run defined as
The period, one money, wage rates, and the prices of all other factor inputs in the economy are fixed. We assume that firms wish to increase output and in the short run are unlikely to take on extra workers.
Is the short run aggregate supply curve, elastic or inelastic?
Relatively price inelastic because in the short run opportunities to react to prices will be limited. There will be a reluctance to sack workers.
What does the short run aggregate supply curve show?
It shows the relationship between aggregate output and the average price level, assuming that money wage rates in the economy are constant
What could cause a shift in the short run aggregate supply curve?
- A change in wage rates: an increase in wage rates will increase prices because of the increased cost of production this would cause a shift up
- Raw material prices: a general fall in the price of raw materials could lower industrial costs, and may lead to some firms reducing the price of their products this would cause a shift down
- Taxation: an increase in the tax burden on industry will increase costs hence, the curve will be pushed upwards
- Exchange rate: if the exchange rate falls, the price of imported goods will rise, causing an increase in prices, and the supply curve would shift up. Conversely arise in the exchange rate, will lead to a fall in the price of imported goods leading to a falling prices, and the exchange rate will shift down.
- Productivity: increases in productivity will increase longer on supply, but will reduce costs of production in the short run so the supply curve would shift downwards
Define: productivity, labour productivity, exchange rate, capital productivity
Productivity is output per unit of input employed
Labour productivity is output per worker
Capital productivity is output per unit of capital employed
Exchange rate is the rate at which one currency will be exchanged for another
Is the aggregate supply curve upwards or downwards sloping and why?
- upward sloping
- if the price of the product increases firms are likely to increase their profits by producing and selling more
- higher the price the higher the output
Why does the (classical) long run aggregate supply curve look the way it does
In the long run, there is a limit to how much firms can increase their supply
This is because there is a limit to the amount of labour that can be hired. Capital equipment is fixed in supply and labour productivity has been maximised so the aggregate supply curve is fixed at a given level output, whatever the price level, so it is vertical on the diagram .
What does the long run aggregate supply curve show?
It shows the productive potential of the economy in the long run. Hence, it shows the level of full capacity output of an economy where there are no underutilised resources and production is at its longer on maximum.
It shows how much real output can be produced over a period of time with a given level of factor inputs, e.g. labour, capital equipment, given level of efficiency .
What does the trend rate of growth show?
Diagram can be seen on Goodnotes
Trend rate of growth: average sustainable rate of economic growth over time, economic factors, bring the GDP back to the trend rate of growth if there is an increase or decrease in the trend rate
What factors could cause a shift in the long run aggregate supply curve? (10)
A change in the quantity or quality of economic resources:
- Technological advances: allows new products to be made with better resources or to a higher quality
- Changes in relative productivity to competing economies: an increase in UK Productivity of a good relative to other world economies encourages production in the UK so firms will invest and LRAS will shift to the right
- Changes in education and skills: improvements will raise productivity of workers, and this increases long run aggregate supply
- Changes in government regulations: this could encourage entrepreneurs although changes like imposing regulations could reduce productive potential
- Demographic changes and migration: migration increases/decreases the size of the workforce. An aging population would reduce LRAS.
- Competition policy: if governments increase competition among firms, it will increase LRAS because it will force them to be more productive and reduce costs. Less competition can also be beneficial if it encourages investment and innovation
- Enterprise and risk-taking: where this is encouraged economy is likely to see increases in LRAS because these new firms will increase output now and in the future when they grow
- Factor mobility: an increase in this will increase LRAS because for example in EU movements of workers increase PP
- Economic incentives: improvement in this can increase aggregate supply, because, for example, giving tax incentives for the unemployed can reduce unemployment
- The institutional structure of the economy: this refers to the political system, laws, the education system, the banking system, the framework of morality and behaviour, and other systems. This determines how in economy works, because if there is a strong tradition of bribery and corruption, then making the system accord more with law increases LRAS. Or if the banking system is weak, creating a stronger banking system will encourage households to save and make funds which would increase LRAS.
What does the Keynesian long run Aggregate supply curve suggest?
The economy can be an equilibrium below full unemployment
What is factor mobility?
This involves the movement of factors between firms within an industry
mobility may involve the movement of factors across industries within a country.
- This is a good thing because an increase in this means that existing factors of production can be used more efficiently and are less likely to be unemployed or underutilised
