Macro 5 - Aggregate supply Flashcards
Aggregate supply definition
Total value of goods + services produced in an economy over a given time period
What does the keynesian aggregate supply curve (Long run AS curve) look like?
What is the first main section of the AS curve?
- When output is low, and unemployment is high, firms can increase output without an increase in prices.
Why can firms increase output without an increase in prices when output is low and unemployment is high?
Because, at low levels of output the AS is greater than AD which means there is excess stock left over, suggesting there is a lack of demand, firms pay off workers and surplus stock means prices will fall.
What is the second section of the AS curve?
As output increases, a point is eventually reached that any further output will be met by an increase in prices
Why is there a point on the AS curve that any further output would result in an increase in prices?
As demand for goods and services increase, firms hire workers due to derived demand and unemployment decreases. Eventually, factors of production become scarce, and costs must rise.
What is the third section of the AS curve?
Eventually AS reaches full capacity, which means output cannot be increased without increasing prices, shifting PPF curve.
What does the vertical / Neo - classical LRAS curve look like?
What does the Neo classical economists believe about the factors of production in an economy.
Neo classicals believe that the factors of production are all fully employed and there is no spare capacity in an economy.
What assumption is the SRAS Short run aggregate supply curve rely on?
That firms can temporarily increase output by employing more workers.
What does a shift in AS mean?
the total output producers are willing and able to supply changes at any given price level.
What are the main factors that cause SRAS to shift in the short run
costs of production like raw materials, wages and indirect taxes
How does wages affect costs of production?
Wages increase, so costs of production increase, wages form largest proportion of total costs, SRAS curve shifts left
How does immigration affect costs of production?
immigration increases, supply of labour increases, surplus of labour means wages fall, SRAS curve shifts right
How does Raw material costs affect costs of production?
Raw materials price increases, cost of production increases, SRAS curve shifts to the left
How does indirect tax and subsidies affect costs of production?
Indirect tax increases, costs of production increase, SRAS shifts to the left.
Subsidies increase, cost of production decreases, SRAS shift to the right.
How does exchange rates affect costs of production?
weak pound, cost of importing raw materials increases, SRAS shifts left
When will the long run aggregate supply curve shift?
When there is a change in productive capacity. (Quantity and quality of factors of production)
How does the labour factor of production change in quality and quantity?
Training and immigration
How does the capital factor of production change in quality and quantity?
good quality capital more capital
How does the land factor of production change in quality and quantity?
fertilisation and buy more land
How does the enterprise factor of production change in quality and quantity?
increase subsidies and enterprise zones
