T2: LS4 - Aggregate Supply Flashcards
What are the two types of Aggregate supply and their definitions
- Short-run Aggregate Supply (SRAS): refers to the total quantity of G&S that all firms within an economy can and are willing to produce at different price levels in the short run assuming all other factors are constant where at least on FOP is constant.
- Long-run Aggregate Supply (LRAS): refers to the total quantity of G&S that all firms with an economy can are willing to produce at different price levels when all factors of production are variable but also used at their optimum capacity.
What is the difference between what causes a shift or movement along the AS curves?
- shifts are caused by non-price factors causing an increase or decrease in supply whereas movements are caused by changes in the general price level causing extensions/contractions.
What factors determine shifts in the SRAS curve?
P - productivity
I - Indirect tax
N - Number of firms
T - Technology
S - Substitutes
W - Wages/ weather
C - Costs
How may different models of LRAS are there and what do they look like graphically?
2 models
Classical model: shows LRAS as a vertical line going upward being perfectly inelastic
Keynesian model: shows a singular curve where the gradient of SRAS changes until it reaches a straight line.
Why do Keynesian and Classical models and views on LRAS differ?
- Classical model LRAS: assumes that in the long-run, full employment of FOP will be reached and changes to the price level will not impact LRAS.
- Keynesian model LRAS: is curved since Keynesians believe that in the long-term output can be below full capacity and not at full employment.
What are the factors impacting LRAS
T - Technology
R/R - Regulation/ Resources
I - Indirect tax
C/C - Costs/ Confidence
E - Education
P - Policy
S - Subsidies
What does a Keynesian AS graph look like and what are the sections
- curved graph from completely horizontal to completely vertical with 3 segments
1. Horizontal segment with perfect elasticity in supply where price is constant and output can change due to space capacity. Occurs in a recession
2. Upward-sloping resembles SRAS where both price and quantity can impact the curve
3. Vertical segment at full employment where output is at optimum and only price changes.
How does Technology impacts LRAS?
- Improvements in technology allow for more efficiency in producing services and communication as well as improving logistics
- Improvements in technology lead to better functioning capital goods leading to larger outputs of supply being produced compared to other capital or labour
How do Resources/ regulation impact LRAS?
- An improvement or overuse of resources can result in more or less raw materials used to make G&S. This can limit or allow for more G&S to be produced in the long-run.
- Regulation may encourage more production of G&S through promoting production or could deter it through policies limiting production.
How do Indirect taxes impact LRAS?
- An increase in Indirect taxes (e.g. VAT) can lead to increased costs to producers of making G&S. These increases in cost can result in them having to decrease their workforce and can result in them being able to afford less units of a G&S’s raw materials. Shifts LRAS left
How do Costs/ confidence in the economy impact LRAS?
- Costs: increased costs result in less supply being able to be produced. Shifts LRAS
- Business confidence: less confidence in the economy reduced investment and leads to less consumption.
- Lower AD and less investment results in less G&S being produced (mainly in SRAS)
How does Education standards impact LRAS?
- Improvements in LRAS lead to the labour force being larger with more economically active individuals. Results in larger output produced of G&S and more innovation leading to more productivity and better manufacturing processes.
How does Policy impact LRAS?
Supply side policies: results in more or less production being encouraged in the free market and government intervention (e.g. deregulation, privatisation, public sector investment, vocational training)
How do subsidies impact LRAS?
- Long-term subsidies being applied on merit goods or in certain sectors can reduce costs of production.
- Leads to lower consumer prices protecting social welfare but lower costs prompt larger supplies to be produced (mainly SRAS)
