Theme 2- Aggregate supply (key terms)

Question 1

Aggregate supply

Answer 1

total supply of goods/services produced within an economy at a specific price level at a given time

Question 2

Short-run AS influences

Answer 2

• Changing costs of raw materials
• Changing cost of energy (oil, coal, renewables)
• Changing exchange rates
• Changing tax rates

Question 3

Long-run AS influences

Answer 3

• Improvements to quantity or quality of the factors of production
• Technological advances
• Changes in relative productivity
• Education and skill levels in the economy
• Government regulations
• Demographic changes and migration
• Competition policy

Question 4

Classical AS

Answer 4

• The Classical view is that LRAS is inelastic - suggests that real GDP is determined by supply-side factors – level of investment, level of capital and the productivity of labour etc
• Classical economists suggest that in the long-term, an increase in AD (faster than growth in LRAS), will just cause inflation and will not increase real GDP

Question 5

Classical short-run AS curve

Answer 5

Upward sloping curve - straight line left to right

Question 6

Classical long-run AS

Answer 6

Vertical straight line

Question 7

Keynesian AS curve

Answer 7

3 phases: Horizontal at low levels of output, then upward sloping (bottlenecks) then vertical (full capacity or full employment)

Question 8

Bottlenecks

Answer 8

Where restrictions in the capacity to increase production occur, meaning that prices will start to rise as output rises

Question 9

Spare capacity

Answer 9

Under-utilisation of the factors of production so there is room to increase output

Question 10

Competition policy

Answer 10

Any policy which seeks to promote competition & efficiency in markets and industries

Question 11

Productivity

Answer 11

A measure of efficiency = output per unit of input or output per person employed