Theme 2 - Aggregate supply Flashcards
What is the definition of aggregate supply?
Aggregate supply is the total supply of goods and services that a firm plans on selling over a given period of time.
What is the Keynes interest rate effect?
The Keynes interest rate effect stats that when price increases as a result of inflation, this will decrease demand as people can afford less. Interest rates will therefore decrease as a result of consumption and investment decreasing. (This is why AD is downward sloping)
What is the Pigou’s wealth effect?
With a higher price level, for example inflation, every extra £ someone earns will be worth less and so people consume less. (Real-life balance effect).
What Mundell - Flemings exchange rate effect?
When price increases, this means that exports are more expensive and imports are cheaper. This causes a contraction in aggregate demand.
What are micro summations?
Every individual micro markets have a downward sloping AD curve and so, overall AD curve is downward sloping.
What is short-run aggregate supply?
A graphical model showing the positive relationship between real GDP and the average price level.
What might a company do if they want to increase production in the short run?
A company may not employ new staff as this isn’t cost-effective and they may need to be committed but may cause redundancy’s if sales fell so, they may have to provide over-time to provide an incentive to get a bonus etc.
Factors influencing short run AS
Greets Government spending Raw materials Exchange rates Employment costs Taxations and subsidies Shocks
What is the main cause of a shift in SRAS
Cost of production
What is LRAS?
In LRAS all factors of production are variable (wages can change)
What is the classical view on LRAS?
Markets tend to correct themselves quickly. If a market is in disequilibrium at a point in time, markets will naturally move back towards equilibrium where there is no spare capacity and the economy is producing at its full productive potential.
What is the Keynesian view on LRAS?
There is an equilibrium below full employment. At horizontal point, firms do not have to offer high wages to offer employment. Before the vertical line, labour is becoming more scarce and so firms offer higher wages. At top of vertical line, firms are at full employment and output becomes price inelastic.
Linking to the Keynesian model, why might wages not fall below a certain level?
There is a minimum wage that we cannot fall below
Workers will be unwilling to work for little pay.
Influences on Long run aggregate supply
size of the workforce, size of capital stock, levels of education and labour productivity.
What causes a shift in LRAS
A change in the quality of quantity of CELL
