Th2.3: The AS Curve Flashcards
What is aggregate supply?
the volume of goods and services produced within the economy at a given price level
What does the aggregate supply curve indicate?
indicates - ability of an economy to produce goods and services
What does the aggregate supply curve show?
the relationship between the real GDP and the average price levels
What will a business do if they want to increase production in the short-run?
increase the hours of work their employees do
Why would a business that want to increase production in the short-run not employ additional full-time?
they would then be committed to them and have to potentially sack them if sales fell later, creating a bad reputation and potentially being expensive (redundancy packages)
How would firms convince their workers to do these longer shifts?
offering some sort of incentive such as bonuses or one and a half times the basic rate of pay for overtime
Even though the basic wage rates have stayed the same…
both the average and marginal cost of labour per good produced will rise - the business is paying more in wages for every good they produce
The curve is upwards sloping because…
firms are willing to supply more only at a higher price
Short run AS is likely to be…
elastic
Why will the increase in prices be relatively small?
because the factor prices are constant
If demand falls, firms will react by cutting prices in an attempt to stimulate sales. Why will they not be able to achieve much of a reduction however?
constant prices and an unwillingness in the short run to lay off workers
Movements and shifts
a change in price level will lead to a movement along the curve (contraction or expansion)
a shift in the curve is caused by a range of other factors - these depend on whether it is long or short run
What does short run mean?
when at least one factor of production is fixed and cannot be changed
What does long run mean?
all factors of production are variable
