The Characteristics Of AS Flashcards
The AS curve
-AS shows the quantity of real GDP which is supplied at different price levels in the economy
-The SRAS curve is upward sloping because at higher price levels, producers are willing to supply more because they can earn more profits.
Moving along the AS curve
-Only changes in the price level, which occur due to changes in AD, lead to movements along the AS curve.
-If AD increases, there is an expansion in the SRAS from Y1 to Y2. If SRAS falls there is a contraction in SRAS from Y1 to Y3.
Shifting the AS curve
-The SRAS curve shifts when there are changes in the conditions of supply, any of the factors which affect SRAS.
The relationship between SRAS and LRAS
-The short run is the period of time when at least one factor or production is fixed, whilst in the long run all factors of production are variable.
-The short run AS curve only covers the period immediately after a change in the price level. It shows the planned output of an economy when prices change, whilst the cost of production and productivity of the factor inputs are kept constant. A change in one of these will result in the shift of the curve.
-The curve is upward sloping because supply is assumed to be responsive to a change in AD, which is reflected in the price level.
-The LRAS curve shows the potential supply of an economy in the long run. This is when prices, and the costs and productivity of factor inputs, can change. Similarly to the PPF, it can show the economies productive potential.
-The curve is vertical in the classic model, because the supply is assumed to not change as the price level changes.
Factors influencing SRAS
The SRAS curve shifts when there are changes in the conditions of supply. This is usually in the form of costs to the businesses.
-The cost of raw materials and energy may change. A rise in their costs would increase costs for businesses and thus decrease SRAS from SRAS 1 to SRAS 3.
-A stronger currency would reduce price of imports, so imported products would be cheaper. This would reduce business costs. The AS curve would shift outwards, from SRAS 1 to SRAS 2.
-Increased tax rates would increase business costs and therefore decrease SRAS from SRAS 1 to SRAS 3.
LRAS curve- Keynesian
The Keynesian view suggests that the price level in the economy is fixed until resources are fully employed. The horizontal section shows the output and price level when resources aren’t fully employed-there is spare capacity in the economy. The vertical section is when resources are fully employed. Over the spare capacity section, output can be increased (AD1 to AD2) without affecting the price level (stays at P1). In other words, output changes aren’t inflationary. Once resources are fully employed, an increase in output (AD3 to AD4) will be inflationary (price level increases from P2 to P3).
Classical LRAS curve
-This view suggests that output is fixed at each level. All factors of production are fully employed in the long run.
-This means that changing AD, such as from AD1 to AD2, only makes a change in the price level (P1 to P2) and it will not change national output. (Real GDP)
Factors influencing the LRAS
The LRAS curve is influenced by changes which affect the quantity or quality of the factors of production. This is equivalent to shifting the PPF curve ie when the economy is operating at full capacity. An increase in the number of G/S produced would mean that LRAS would shift outwards.
Factors influencing the LRAS-technological advances
If more money is spend on improving technology, the economy can produce goods in larger volumes or improve the quality of goods/services produced.
Factors influencing the LRAS-changes in relative productivity
A more productive labour and capital input will produce a larger quantity of output with the same quantity of input.
Factors influencing the LRAS-changes in education and skills
This improves the quality of human capital, so it is more productive and more able to produce a wider variety of goods and services. They may become more innovative and able to contribute to technological advances.
Factors influencing the LRAS-changes in government regulation
Government regulation could limit how productive and efficient a firm can be if it is excessive. This is sometimes referred to as ‘red-tape’
Factors influencing the LRAS-demographic changes and migration
If there is net inward migration and the majority of the population is of working age, the size of the labour force will increase, which means the labour economy can increase its output.
Factors influencing the LRAS-competition policy
A more competitive market encourages firms to be more efficient and more productive, so they are not competed out of business. Governments can use effective competition policy to stimulate efficiency in the economy.
