Short run Aggregate supply [2.3.2] Flashcards
What is Aggregate supply?
Total amount that producers in a whole economy are willing and able to supply at a given price level in a given time.
What impact will price levels have on the amount of output from firms?
Increase in the price level will encourage a higher amount of output therefore creating higher GDP more profitable and lower costs.
What is the difference between Short run and Long run AS?
In the short run firms have limited ability to increase their FOP as they are fixed. This means that if a firm wants to increase output, it could employ more workers pay more overtime, increasing its cost.
The long run is a situation where all main Factors of production can be increased but are limited by the maximum capacity of the economy.
What is Short run aggregate supply?
(SRAS) is the relationship between planned national output and the General price level
What is Long run Aggregate supply?
(LRAS) shows relationship between potential national output and the general price level.
What shape is SRAS and why is it this shape?
Higher prices encourage firms to employ more workers, increased output and purchase more supplies. lower prices lead to lower employment, output and jobs. SRAS shaped like this because as price level increases so does GDP.
What is LRAS and why is it this shape?
LRAS depends on availability of resources, capital, entrepreneurship and technological developments.
It is vertical because these factors are not related to the level of prices in the economy working close to maximum capacity.
What is the equilibrium output and price level in an AS AD diagram?
When AS curve and AD curves are put together, it shows the AS/AD equilibrium in the economy.
Any shift in AS or AD has an impact on the real GDP and the price level.
What causes shifts in AS?
Changes in resources
Changes in business taxes and subsidies
Supply shocks
Productivity levels.
How does Changes in Resource prices effect AS?
Changes in resources (input) prices
Wages costs per unit of output
Labour productivity (higher efficiency certeris paribus lower unit costs)
Raw materials and component pries such as glass, cement rubber
Energy, costs such the world price of oil, gas and electricity
How do Business taxes, subsidies, regulations and imported costs effect AS?
VAT, environmental charges/ employment taxes
Changes in scale and size of government subsidies to certain industries
Business rates + cost of meeting business regulations and other laws
Cost of imported components (affected by exchange rate + fluctuations in world commodity prices)
How do supply shocks effect AS?
Supply shocks
eg. A hurricane, a tsunami or the effects of drought flooding or a political crisis/ civil warm which can have an effect on a country’s national output.
What causes an inward shift in AS?
Inward shifts are caused by a rise in raw material prices, energy cost or increase in the cost of business regulations
What causes and outward shift in AS?
Outward shift in AS caused by a rise in labour productivity or a decline in energy prices.
