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Macroeconomics > Theme 2 Topic 3 > Flashcards

Theme 2 Topic 3 Flashcards

1
Q

What is the definition of aggregate supply ?

A

The total value of all goods/services produced within the economy at a given price level at a given point in time.

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2
Q

What is SRAS ?

A

Short run aggregate supply is when all factors of production are fixed.

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3
Q

What is the exception to SARAS ?

A

Firms could hire more labour, or make existing labour + other existing resources work harder to meet AD.

This would entail offering an incentive.

Wages stay the same, but average and marginal cost of labour per good produced will rise.

The business is paying more in wages for every good they produce, which is passed onto consumers as higher prices.

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4
Q

Why is the SRAS curve upward sloping ?

A

Firms are willing to supply more but only at a higher price.
It is elastic.
If firms increase output, costs rise, causing a small price increase as firms pass costs onto consumers, since factors of production remain constant.
If AD falls, firms lower prices to boost sales, but they can’t significantly reduce prices due to constant input costs, and reluctance to lay off workers in the short run.

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5
Q

How is SRAS elastic ?

A

Output is relatively responsive to a change in price.

It changes by a greater % than price.

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6
Q

Increase in price level leads to :

A

Expansion in SRAS.

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7
Q

Decrease in price level leads to :

A

Contraction in SRAS

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8
Q

Decrease in price level leads to :

A

Contraction in SRAS

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9
Q

What does a change in AD cause and why ?

A

Causes movement along the SRAS curve.

If AD increases, firms have to hire more labour and make resources work harder to increase supply as they have a chance to increase profits.

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10
Q

What does an increase in costs of production lead to ?

A

A shift to the left

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11
Q

What does a decrease in costs of production lead to ?

A

A shift to the right.

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12
Q

What happens in the long run (LRAS) ?

A

All factors of production are variable and can be increased over time.

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13
Q

What is LRAS ?

A

The maximum possible output an economy can produce as determined by its available factors of production.

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14
Q

What does the upward sloping curve reflect ? (Micro)

A

The upward sloping micro economic supply curves of individual firms, as it represents the total supply of goods and services in an economy.

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15
Q

What does the LAS curve present?

A

The normal capacity level of output for the economy.
It is assumed to be a vertical line (independent of prices)

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16
Q

When does SRAS shift ?

A

When there are changes in the costs of production

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17
Q

What do the changes in costs of production include ?

A
  1. Changes in costs of raw materials and energy
  2. Changes in exchange rates
  3. Changes in tax rates
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18
Q

How do changes in costs of raw materials and energy affect SRAS ?

A

Higher raw materials prices (e.g. oil/metals) increase the firm’s costs of production and reduces SRAS.
This causes a shift in the supply curve to the left.
This impacts the price and quantity supplied, as a reduction in firm’s output causes an increase in price.

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19
Q

How do changes in exchange rates affect SRAS ?

A

Many businesses will import raw materials/components for the production process.
If the currency strengthens, this makes purchasing those raw materials relatively cheaper.
This causes an increase in supply, with SRAS shifting right.

However, there is a negative effect as exports become more expensive, reducing demand.
This leads to UK firms cancelling capital projects, leading to decreased supply in the long term.

20
Q

How do changes in tax rates affect SRAS ?

A

An increase in tax rates (e.g. corporation tax) causes an increase in the costs of production.
This means SRAS will fall, and there will be a shift to the left of the curve.
Larger firms such as multinational corporations may look to avoid paying tax by relocating production facilities to lower costs sites in low tax countries.

21
Q

When do supply slide shocks occur ?

A

When there are major changes in any factors of SRAS.

22
Q

What are supply side shocks ?

A

These are unexpected events that cause large changes in the cost of production.

23
Q

What are negative supply side shocks ?

A

They increase production costs or reduce the availability of resources.

E.g.
A sudden rise in oil prices (increases transport and production costs).
Natural disasters (disrupt supply chains or damage infrastructure).
Labour strikes (reduce workforce availability).

Impact: They shift the SRAS curve to the left, leading to higher prices and lower output in the short run.

24
Q

What are positive supply side shocks ?

A

They reduce production costs or increase the availability of resources.

E.g.
Technological advancements (improve efficiency and lower costs).
A sudden decrease in input prices (e.g., cheaper raw materials).

Impact: They shift the SRAS curve to the right, leading to lower prices and higher output.

25
Q

Difference between SRAS and LRAS :

A

SRAS : Changes in costs of factors of production

LRAS : Changes in quantity or quality of factors of production

26
Q

What is the classical curve ?

A

Suggests that the economy will always produce the maximum that its factors of reduction will allow.
It operates at a full capacity.

Classical economists believe that markets will always function efficiently over the long run, so the economy will produce on the outer boundary of its PPF curve, so the LRAS curve is vertical, marking a maximum limit of production.

27
Q

What does a decrease in the quantity/quality of factors of production cause (classical) ?

A

Shift to the left

28
Q

What does an increase in the quantity/quality of factors of production cause (classical) ?

A

Shift to the right

29
Q

What is the Keynesian curve ?

A

Keynes believed that an economy could be in equilibrium below full employment of resources.
Through his study of the Great Depression (1930s), he concluded that the LRAS curve was upward sloping, and had a vertical section, but at times an economy could settle at a level of output below employment of resources.

30
Q

What are the 3 distinct sections of the Keynesian curve ?

A
  1. Spare capacity
  2. Bottle Necks
  3. Unused capacity
31
Q

What is the spare capacity section (A) of the Keynesian curve ?

A

Firms can increase output without increasing costs.
There are unused resources in the economy (e.g. unemployed labour) not working at full capacity.
If AD increases across point A, there would be no increase in price.

32
Q

What is the Bottle Necks section (B) of the Keynesian curve ?

A

As the economy nears full employment of resources, firms find it more difficult to attract scarce resources, so prices increase.
This is where some restrictions in the supply chain cause costs and wages pressures to build up in some areas of the economy.

E.g. a shortage of a certain type of worker causes wage prices to increase.

33
Q

What is the full capacity section (C) of the Keynesian curve ?

A

All resources are used at this point.

34
Q

What do changes un the quantity/quality of factors of production cause on the Keynesian curve ?

A

A shift in LRAS.

35
Q

Keynesian + classical :

A

Both curves are models and should be used as such, instead of perfect predictors of how an economy may behave.

36
Q

What are the 5 factors that affect LRAS ?

A
  1. Technological advances
  2. Changes in education + skills
  3. Changes in relatively productivity
  4. Demographic changes + migration
  5. Competition policy + changed in government intervention
37
Q

What is labour productivity ?

A

Output per worker

Total output / number of workers

38
Q

What is capital productivity ?

A

Output per unit of capital (e.g. machine)

39
Q

How do micro economic factors have macro economic impacts ?

A

Many factors which affect LRAS (e.g. competition) are micro economic factors.
They can have macro economic impacts if they are widespread enough.

40
Q

How do technological advances affect LRAS ?

A

These can reduce the cost of production (don’t have to employee as many workers)and help to increase productivity
This leads to an increase in supply as firms already in the industry can increase production to earn higher profits
Other firms might enter the industry as the new technology has made it easier and cheaper to produce goods and services, thus allowing them to be profitable.

41
Q

How do changes in education and skills affect LRAS ?

A

If there is an increase in the quality of the labour force productivity is enhanced and LRAS will increase
This could take place through training and education of the workforce
This should lead to an increase in efficiency and skills
A higher skilled workforce is better able to innovate and continually improve production processes
This will help shift LRAS to the right

42
Q

How do changes in relatively productivity affect LRAS ?

A

The UK lags behind its competitors when it comes to productivity
This could be for a number of reasons such as a lack of investment in quality capital equipment, poor education and training or poor management of the factors of production
By investing in all of the factors of production changes in relative productivity can be made.
Economists measure the productivity of all factors of production.

43
Q

How do demographic changes and migration affect LRAS ?

A

Changes in population have had an impact on LRAS. There has been an increase in the UK population due to increasing life expectancy and immigration. The UK population in 2018 was 9 million more than it was in 2000. If there is an increase in the size of the labour force through immigration, then it might be expected that output will increase.

44
Q

How do competition policy and changes in government intervention affect LRAS ? (Competition)

A

A main objective of the UK Government is to increase competition in markets in order to improve quality, increase choice and create growth in the economy
If successful, then greater competition can drive efficiency gains amongst firms as they strive to maximise their profits
Increased competition will lead to greater innovation amongst firms
It will help to drive down costs which will help shift the LRAS curve to the right
The Competition and Markets Authority (CMA) was set up in 2013 to enhance competition in the UK

45
Q

How do competition policy and changes in government intervention affect LRAS ? (Workforce)

A

Another objective is increasing the workforce as this means output increases.
The government can do so by decreasing unemployment (decreasing benefits, offering job training) or by encouraging people to go to work (offering free childcare).

46
Q

How do competition policy and changes in government intervention affect LRAS ? (Regulation levels)

A

Government regulations can either increase or decrease LRAS depending on their nature:

Low regulation = boosts business activity and reduces costs, increasing output

High regulation = increase business costs and reduces output

Macroeconomics (5 decks)

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