MACRO - LS4 - Aggregate Supply Flashcards
Aggregate supply definition
- Quantity of goods/services that producers are willing and able to supply at a given level of prices in a given time period
- sum of all industry supply curves in an economy
SRAS Definition
- The period when money wages and the prices of all other factor inputs are fixed
- total planned output when the general price level can change but the prices & productivity of factor inputs are held constant
How do firms increase output in short run
- Won’t take on extra workers as they would then be committed to them and have to potentially sack them if sales fell later, which would create a bad reputation and may be expensive (redundancy packages).
- work existing labour force more intensely e.g. overtime, will have to pay them more, leads to rise in labour costs and then prices, if rise in some sectors then average price level of economy increases
- relatively price elastic - large output change causes small price change
What happens if demand/real output fall in the short run?
- Some firms will react by cutting prices to try and stimulate extra orders
- opportunities to cut prices will be limited
- firms would be reluctant to sack workers/overheads remain same so prices don’t change by much despite large output change - price elastic
Factors that affect SARS - cause shift
- wage rates - increase causes production costs to increase which will cause prices to increase, shift to left
- raw material prices - if pound is stronger, imports cheaper, reduces raw material prices, causes prices to decrease, shift to right
- taxation - increase in tax burden, increase costs and price, shift to left
- exchange rate - if falls, import price increase, so do prices, cause shift to left
- productivity - causes a reduction of prices in short run, shifts to the right
- change in education - increases productivity
- indirect taxes/subsidies - increases/reduces costs of production shifting SRAS
Exchange rate definition
The rate at which one currency will be exchanged for another
Also regarded as the value of one country’s currency in relation to another
Productivity, labour productivity, capital productivity definition
- output per unit of input employed
- output per worker
- output per unit of capital employed
LARS defintion
It shows the productive potential of an economy
Classical LARS on graph
Shown vertically
Shows economy working at full capacity, as there is a limit of labour, capital equipment so can argue in long run AS is fixed at a given level real output, whatever the price level
What can LARS be linked to
- PPF
- trend rate of growth for an economy
What causes a LARS shift
Increase/decrease in quantity and/or quality of factors of production
Supply-shock
Large change in wage rates, raw material costs, taxation
- causes a large change in AS
What causes a shift in LARS
- Tech advances - allows new products to be made or with fewer resources - capital productivity increases, shift to the right
- change in relative productivity compared to competing economies - increase in productivity of good in UK will encourage production, cause investment and shift to right. LARS of world economy will increase if more specialisation between economies as production will be in cheapest/efficient place
- change in education/skills - will increase productivity and therefore LARS
- change in government regulations - making it simpler to set up businesses gov would increase LARS
- demographic changes/migration - increase in population and then LARS, aging population decreases LARS
- competition policy - gov policies that increase competition amongst firms will increase LARS, as firms have to be more productive to reduce costs or more innovative. Less competition can sometimes be useful if it encourages investment/innovassions e.g without patents time spent on R&D would be useless as copied
- enterprise & risk taking - when encouraged, likely rise in LARS, new firms increase output and competition
Factor mobility
ease in which the factors of production can be put to different uses
Keynesian LARS
Takes into account an economy can be in equilibrium below full employment as not all resources are being utilised
