THEME 2, Aggregate supply (2.3) Flashcards
What is Aggregate Supply?
- Total output
- The total supply of goods and services produced within an economy at a given overall price in a given period
What are SRAS
Short run aggregate supply
What are SRA’s impacted by?
- Costs of factors of production
- Laws
- Indirect taxes and subsidies
What are LRAS
- Long run aggregate supply
What do LRAS measure?
- Productive potential
- This is equal to a PPF for the whole economy
What determines/impacts LRAS?
- The 2Q’s
- Quality and quantity
- … of factors of production
- Changes in the barriers to entry of a market
- Immigration and population change
What are the 6 main Macroeconomic objectives?
- Economic growth… high marginal prosperity to spend on imports
- Limiting inflation (1%-3%)
- Managing unemployment
- Managing balance of payments (X-M)
- Environmental objectives
- Managing wealth inequality
What is factor mobility?
*Factor mobility is about the ability of your factors of production to move to two ways.
* Geographically mobile (willingness to move locations for a job)
* Occupational mobile (is your skill set transferrable between different jobs?) - when skills are too specialised it becomes harder to get a job, hence you are not mobile
What is a budget deficit?
- When GOVt spends more than its allowance from taxes
- This almost always happens
- This however, increases AD
What is on the X and Y axis of an AS diagram?
- X-axis - RNO
- Y-axis - Price level
What happens when there is a rise in exchange rate in regards to exports?
- When the £ increases, exports seem more expensive
- Therefore there are less imports
- So AD decreases
What happens to AD when interest rates fall?
- Mortgages become cheaper
- People have more money to consume
- AD increases
How would corporation tax impact LRAS?
- Lower rates of corporation tax means that there is more money to spend
- Investments increase
- LRAS shift to the right
- AD increases
What happens to LRAS when state pensions are increased?
- LRAS move to the left
- There is less productivity
How does an increase of indirect taxes affect consumption?
- Consumption reduces
- EXAMPLE
- When a GOVt increases minimum wage, what happens to SRA’s and AD?
- SRAS would increase as cost of labour increases
- AD increases are people are more likely to consume
What does a positive output gap mean?
- We are growing faster than the trend rate
What does a negative output gap mean?
- We are growing slower than the trend rate
What things can impact/influence LRAS?
- Technological advances
- Changes in relative productivity (e.g. age of population)
- Changes in education and skills
- Changes in GOVt regulations
- Demographic changes and migration
- Competition policy
Does factor mobility affect LRAS?
- Yes
Why is the Classical LRAS curve the shape that it is?
- Due to the invisible hand everything will self correct
- Supply is perfectly inelastic
- Total output is fixed as everything is being used as efficiently as possible
What is the invisible hand?
- Due to the self interest of firms and individuals, the market will fix itself to become as efficient as possible.
What are animal spirits?
- The idea that human emotions affect consumer confidence so they may act randomly on gut instinct and act irrationally.
What shifts both AD and AS?
- Immigration
- Income tax
- Interest rates
- Minimum wage
- Investment
Which factors influence short-run AS?
- Changes in costs of raw material and energy
- Changes in exchange rate
- Changes in tax rates
In what direction is the AS curve?
*Upwards because firms are willing to supply more but only at a higher price
What type of elasticity is SRAS likely to be?
- Elastic
What does it mean when a time is Short Run?
- One factor of production is fixed and cannot be changed
What do classical economists believe about employment in long run?
- There will be full employment
Explain the shape of the classical long-run AS curve.
- Classical economists believe that the LRAS curve is a vertical line at the full employment level of resources.
- This is because they think that in the long run the economy will operate at the full employment level of resources.
