Supply Flashcards
Describe short run aggregate supply
- upward sloping= firms need higher price to make temporarily increasing their output to be profitable
- Eg overtime pay is usually higher than standard pay so prices need to be higher to make it worth it for firms
Why is SRAS shifted
Changes to costs of production
- nominal wage rates
- raw material costs
- oil prices
- taxes
- productivity
- exchange rates
Describe long run aggregate supply
total amount of production in an economy given that its full resources are employed
shows relationship between price level and real GDP supplied if all prices, including nominal wages, were fully flexible
= price can change along the LRAS, but output can’t because that output reflects the full employment output
= therefore perfectly inelastic
= cause it to be vertical
Why does LRAS shift
Changes to quantity and quality of factors of production
- land (new resources, new tech in agriculture to grow crops all year)
- labour (immigration, eduction, health)
- capital (anything that affects investment spending firms eg interest rates)
- enterprise (anything to support risk bearing in business eg support for new firms and strong bank sector)
Define aggregate supply
Total output produced in an economy at a given price level over given period of time
Describe Keynesian theory
- demand drives supply economies spend or invest more than they save
= To create jobs and boost consumer buying power during a recession, govs should increase spending, even if it means going into debt to help increase aggregate demand to close the negative output gap
What happens at low levels of output
AS is perfectly elastic
= spare capacity means we can increase output wo increasing price levels
What happens at end of Keynesian diagram
AS becomes perfectly inelastic
= all resources used to full potential
= output can’t increase even if there’s a price rise
What’s YFE
Full employment level of output
= max level of output an economy can produce using all factors of production at sustainable levels
Describe AS in short run
Upward sloping
= higher prices incentivise firms to expand to produce more output to make more profit
define long run
all factors of production and costs are variable
= allows firms to operate and adjust all costs
= variable number of producers in the market
= firms able to enter and leave market during times of profitability and loss
define short run
keeping one or more production inputs fixed while changing others
Factors Influencing the Position of the AS Curve
- Level of Investment= investment is high= productive capacity will increase and efficiency of FOP will increase=leading to a fall in production cost= lead to greater supply at any given price level
Define Law of demand
There is a direct relationship between price and quantity supplied
As price increases, quantity supplied increases vice versa
Non price factors that affect supply
Productivity
Indirect tax
No. Of firms
Tech
Subsidy
Weather
Costs of production
= transport, oil, raw materials, regulations
