Macro 2.3 Flashcards
What is aggregate supply (AS)?
The volume of goods and services produced within the economy at a given price level
It indicates the ability of an economy to produce goods and services and shows the relationship between real GDP and average price levels.
What does the AS curve indicate?
The relationship between real GDP and average price levels
It shows how much goods and services can be produced at different price levels.
What is the behavior of firms in the short run to increase production?
Firms may increase employee hours, hire temporary workers, or offer overtime incentives
They avoid hiring full-time staff to reduce long-term commitments.
What happens to the average and marginal cost of labor per good produced when wages remain constant but production increases?
Both the average and marginal cost of labor per good produced will rise
This is because businesses pay more in wages for every good they produce.
Why is the short-run AS curve upward sloping?
Firms are willing to supply more only at higher prices
This reflects the increased costs associated with higher production.
True or False: Short-run AS is likely to be elastic.
True
Output is relatively responsive to a change in price.
What causes a movement along the AS curve?
A change in price level
This results in either contraction or expansion of supply.
What are the fixed factors in the short run on the AS curve?
Money wage rates, factor prices, and state of technology
Changes in these factors result in a shift of the curve.
What is the main cause of a shift in short-run AS (SRAS)?
A change in the cost of production
This can be influenced by changes in raw material costs, exchange rates, or tax rates.
How do changes in raw material costs affect SRAS?
An increase in costs shifts the SRAS curve left
This reflects higher production costs leading to reduced output at the same price levels.
What impact does a weaker pound have on SRAS?
It increases the price of imports, causing SRAS to decrease
This makes production more expensive for businesses.
What effect do taxes have on SRAS?
They increase production costs, causing SRAS to shift left
Conversely, subsidies can shift it to the right by decreasing costs.
What is a supply-side shock?
Significant changes in factors influencing AS
These can lead to shifts in the SRAS or LRAS curves.
In the long run, what limits supply increases?
The availability of people and machines
Once labor productivity is maximized, supply cannot be increased further.
What is the classical view of the long-run AS curve (LRAS)?
LRAS is independent of the price level and determined by factors of production and technology
It shows a country’s potential output.
What does a rightward shift of LRAS indicate?
Economies can produce more goods
This is similar to an outward shift of the production possibility frontier (PPF).
What did Keynes argue about the LRAS curve?
It cannot be vertical because economies can be in disequilibrium for extended periods
This suggests that the relationship between wages, prices, and employment is more complex.
What are the reasons why wages tend to be ‘sticky downwards’?
Unions, business demotivation risks, worker wage expectations, labor mobility issues, and minimum wage laws
These factors prevent wages from falling below a certain level.
What happens to the LRAS when unemployment is high?
The curve is perfectly elastic
Firms do not need to offer high wages to attract staff.
What is the relationship between employment and wage levels as we approach full employment?
As employment rises, firms must offer higher wages to attract workers
This leads to higher average price levels.
What does increasing productivity mean in the context of LRAS?
More goods can be produced with the same resources or increasing resources allows more goods to be produced.
This refers to the long-run aggregate supply (LRAS) and its relationship with resource efficiency.
What can cause supply-side shocks to the LRAS curve?
Examples include a huge technological advancement or a war.
Supply-side shocks can significantly affect the productive capacity of an economy.
How do technological advances affect the LRAS curve?
Improvements in technology shift the LRAS curve to the right, meaning more can be produced.
This is because technology speeds up production processes.
What is the impact of increased investment in technology on LRAS?
It increases LRAS as more goods can be produced because there are more machines, etc.
Investment in both new and current technology plays a crucial role in productivity.
What factors influence productivity in an economy?
Factors include efficiency, skill of labour, and technology.
Productivity is essential for the overall economic output.
How does a more productive UK economy affect LRAS?
It encourages production of that good in the UK, leading to increased investment and higher LRAS.
Relative productivity can shift economic dynamics significantly.
What is the effect of a more skilled workforce on LRAS?
It results in increased output per worker, shifting LRAS to the right.
A skilled workforce is crucial for economic efficiency.
How can education impact structural unemployment?
Education improves occupational mobility, decreasing structural unemployment as people can switch to new jobs.
This enhances the efficient use of resources in the economy.
How can government regulations impact LRAS?
They can increase the size of the workforce and encourage people to return to work.
Government policies can directly influence labor market dynamics.
What are some ways government can increase workforce participation?
- Encouraging return to work
- Decreasing inactivity
- Offering free childcare
- Reducing benefits to motivate job seeking.
These measures can significantly shift LRAS.
What demographic changes can affect LRAS?
Higher immigration than emigration increases the population and workforce, raising LRAS.
The age and skill level of immigrants are also vital considerations.
What is the relationship between the working-age population and LRAS?
A larger working-age population increases LRAS as more goods can be produced.
Demographics play a critical role in economic productivity.
How does competition policy affect LRAS?
Promotes competition among businesses, improving quality and efficiency, which increases LRAS.
However, less competition can sometimes foster investment and innovation.
True or False: High regulation on businesses will likely increase LRAS.
False
High regulation can increase costs and reduce output, thereby limiting LRAS.
What is one potential benefit of less competition in a market?
It can encourage investment and innovation, as businesses may seek to protect their ideas.
Copyright laws exemplify this by preventing idea copying.
