theme 2 - Aggregate supply Flashcards
what is the position of short run aggregate determined by
- cost of poduction
- if cost of production increases, SRAS shifts to the left
what costs of production can affect firms
- wages - if the wages of the economy go up, costs of production will increase, SRAS will shift to the left, vice versa
- an increase in the price of commodities and raw materials in the economy will cause an increase in the costs of production, leading to SRAS shifting to the left
oil - if oil prices increase, cost of production for firms increases, as oil is used for things like energy SRAS shift to the left
business taxes like Vat - increased VAT = increased cost of production, shifts SRAS to the left
import prices - if there is a strong exchange rate, imports will be cheaper, meaning that firms who rely on imports cost of production will fall, sras shifts right, vice versa
when there is a shift in SRAS, what is it caused by
a supply shock, as they ususally happen under short notice
at what level of output will the economy always produce at in the long run on the classical interpretation of LRAS
at YFE
what is yFE
the full employment level of output, and it represent the maximum level of output an economy can produce using all its factors of production AT SUSTAINABLE LEVELS
when will LRAS move beyond YFE
if one of the factors of production arent being used unsustainably, for example, too much over time
what do classical economists believe about LRAS
there is only one level of output, which is why the LRAS curve is vertical
when are we at the full employment level of output
when the economy is at it natural rate of unemployment
what is the natural rate of unemployment in the uk
4.5 percent
when will lras shift to the right
qqcell - quality and quantity of capital, enterprise, land and labour increases
- improvement in productive efficiency of the economy
- labour productivity increasing
- increased investments, eg machinery, research and development costs, improves capital
- infrastructure improvements, reduces long run costs, improving productive efficiency of the economy, quantity and quality of capital stock improves
- increase in quantity of labour, eg immigration
- competition - privatisation, trade mobilisation, if competitiion increases throughout the economy, firms will try to lower costs as much as possible to beat their rivals
- resources - finding new resources increases the quantity of land
examples of things that will shift LRAS to the left
- decrease in labour productivity
- wars, natural disasters that destroy infrastructure, reducing amount of capital, these could also lead to death, reducing the quantity of labour
- mass capital depreciation
- health crises in the economy, eg a pandemic which can affect the labour productivity of workers
- hysteresis - quantity of labour decreases
- emigration - workers leaving the economy can reduce the quantity of labout
what is hysteresis
a phenomenon caused by unemployment, where workers become discouraged and then drop out of the labour force
what does it mean when the LRAS curve shifts
shifting right increases potential output, shifting left decreases potential output
similarities and differences between keynes LRAS graph and the classical one
similarities - in both, there is a point where we reach full unemployment, where the line becomes vertical
differences - Keynes disputed the idea of there being a long run and short run aggregate supply
- he also states that the economy could be producing less than YFE3 and that could be a long run level of output, and it could be a long run equilibrium in the economy
- the shape of the Keynes diagram is bendy, due to level of spare capacity in the economy
what do classical economists believe abt equilibrium
there are two types - short run equilibrium and long run
