Unit 4, Area of Study 2 - Aggregate Supply Policy Flashcards
Capacity constraints
Factors that prevent (or constrain) an economy from producing more goods and services such as, skill shortages and infrastructure bottlenecks.
Production
the process of converting resources and inputs into goods and services or the total volume (or value) of goods and services produced over time.
Productivity
the volume of output (e.g. real GDP) that is produced from a given number of inputs (e.g. labour and capital resources).
Productive capacity
the point at which production (or GDP) is occurring at the maximum level possible in an economy.
Aggregate Supply
represents the total volume of goods and services that all suppliers have produced and supplied over a period of time.
It is important to note that, “the willingness and ability of suppliers to supply” influences aggregate supply, however, it is not a definition of aggregate supply.
Infrastructure
Infrastructure refers to the key physical or organisational structures within an economy that provide the ‘building blocks’ around which economic activity can take place.
Spending on infrastructure will help achieve SSEG by …
- Boosting productivity
- Boosting efficiency
- Boosting long term productivity capacity
- Removal of capacity constraints / bottlenecks
- All increase AS = increase in output (GDP) = strong growth.
- ↑ productivity, ↑ efficiency and ↓ cost of production = reduce cost inflationary pressures = long term sustainable growth
- Achieving low cost inflation = increase in international competitiveness = increase in AD and more sustainable growth in real GDP.
Spending on infrastructure will help achieve Low inflation by …
- Improved efficiency = lower per unit production costs = lowing cost inflationary pressures.
- Reduced costs due to fuel, maintenance and time with infrastructure on roads, rail and other types of transport infrastructure.
- Removal of capacity constraints / infrastructure bottlenecks reduces production costs.
- Improved transport = mobility of workers = high participation rate (lower wages) and availability of required skills.
- Controls cost inflationary pressures in the economy.
Spending on infrastructure will help achieve full employment by …
- ↑ levels of output (GDP) means businesses are likely to require more workers = ↓ in unemployment
- Keeping production costs lower = ↑ in international competitiveness = business expanding into new markets and employing more staff = ↓ in unemployment
Spending on infrastructure will help improve living standards by …
- Investment in infrastructure assists in maximising or boosting material living standards by:
- Improved purchasing power via downward pressure on inflation•Boost to real incomes via employment growth
- Investment in infrastructure assists in maximising or boosting non-material living standards by:
- Lower unemployment = improved happiness and feelings of self worth, lower crime rates and better health outcomes.
- Investment in infrastructure can reduce market failure and the underproduction of public goods.
Strengths of spending on infrastructure as an AS policies in achieving the goals.
Can positive long term impact on the productive capacity of the economy, reducing inflationary pressures / protecting environment / reducing market failure.
Weaknesses of spending on infrastructure as an AS policies in achieving the goals.
- Used as a political tool in the election cycle.
- Financial constraints of the budget limiting Federal governments ability to fund infrastructure projects / high public (govt) debt levels.
- Impact lag - it often takes years before the investment in the infrastructure has an impact on the productive capacity of the economy.
Aims of Aggregate Supply policies
- Push AS curve to the right
- Boost Australia’s productive capacity
- Enable higher output (GDP) at lower prices and higher employment levels
- Lower inflation
- Increasing real GDP, without adding to inflationary pressure in an effort to boost living standards (sustainable growth).
- Lower production costs enable firms to reduce prices for any given level of output – without sacrificing profits!
- Alternatively, a bigger productive capacity facilitates greater national output before capacity constraints (and inflation become a problem).
Impact of dynamic efficiency on AS
Positive impact on productive capacity of the economy and aggregate supply by ensuring resources are quickly reallocate through creative and innovative means ensuring an economy can maximise its volume of production of goods and services over any given period of time.
Impact of inter-temporal efficiency on AS
The drive to achieve inter-temporal efficiency can often result in a short term drag on Aggregate Supply, however in the long term it helps boost the productive capacity of the economy, and increases aggregate supply (volume of production of goods and services over a given period of time through efficiency gains and prevention of the negative impacts of climate change impacting producers ability to produce (e.g., the occurrence of extreme weather events that lead to damage and destruction of key infrastructure such as road, rail and ports).
Impact of inter-temporal efficiency on AS
By maximising output and maximising living standards, allocative efficiency is achieved.
And in the process Aggregate supply is maximised both in the short, medium and long term when allocative efficiency is achieved, via the productive capacity of an economy and volume of production of goods and services over any given period of time.
Impact of productive efficiency on AS
Maximising outputs from any inputs, this ensures the maximum volume of production of goods and services over a given period of time in an economy
Relationship between AS policies and achievement of SSEG
Australia’s rate of economic growth is limited to the speed at which our productive capacity can expand.
By boosting productive capacity, AS policies will increase speed limit enabling a higher rate of economic growth coupled with lower inflation.
Results from downward pressure on prices = expansion in AD (via greater C, I and X-M) which = increase in real GDP (economic growth).
Lower prices = sustainable growth as no inflationary pressures.
Environmental policies ensuring that environmental pressures do not build up in the economy assisting sustainability.
Relationship between AS policies and achievement of Low Inflation
By boosting productivity and reducing costs of production = lower cost inflationary pressures, this has come in the form of market deregulation, infrastructure investment, labour market reforms, and immigration).
Increasing productivity capacity (and Aggregate Supply), shifting the AS curve to the right, reducing cost inflationary pressures.
Relationship between AS policies and Full Employment
Increased volume of production = increase need for additional workers to increase production = reduction in levels of unemployment