Shift in Aggregate Supply

Question 1

How does SRAS shift (using curve)?

Answer 1

Increase in costs will cause SRAS to shift left (upwards) and decrease in costs will cause SRAS to shift right (downwards)

Question 2

How does LRAS shift (including curve)?

Answer 2

Increased in productivity and maximum potentail will shift LRAS outwards while decrease in productivity and maximum potential will shift LRAS inwards

Question 3

What are the factors that shift SRAS?

Answer 3

• * Wage rate
  Increase in wage rates leads to increase in firms costs of production. 70% of costs are wages on average. SRAS decreases, SRAS shifts inwards
• **Productivity **
  An increase in productivity which is output per worker per hour will reduce short run production costs of production for a firm, SRAS increaces and shifts outwards.
• *** Raw materials and energy **
  If price of raw materials used in production of good/service increases then costs of production will increase. Energy [oil] is an influential costs as all firms need energy to produce goods and services. This will cause SRAS to decrease and shift inwards.
• * Exchange rate
  If exchange rate depreciates so that imports are more expensive then, cost of production will increase causing SRAS to decrease, SRAS shifts inwards
• * Indirect tax rate
  Increase in indirect tax will increase costs of production and decrease in SRAS, SRAS shifts inwards

Question 4

What are the factors that shift LRAS?

Answer 4

Factors which affect maximum productive potential
* **Technological advances **
Improvement in technology and capital productivity means output per unit is greater and therefore maximum productive potential of an economy is greater and LRAS will increase and shift outwards
* **Productivity **
Productivity refers to output a single unit of resource can produce. If resources in an economy become more productive i.e they can produce more output, then economy LRAS will increase and shift outwards
* Education and skills (Human capital)
If workforce is more educated or obtain better skills then it will be more productive. More productive workforce will be able to produce more goods per worker and so LRAS will increase and shift outwards
* Governments regulation
If governments increases regulations e.g health and safety then this can slow down production processes, making them less efficient reducing quantity of goods produced, decreasing LRAS and shift inwards
* **Demographic and migration **
Increase in migration allows supply of labour to increase LRAS. Influx of young people will also increase LRAS because this has increased supply of workers. SRAS shifts outwards