2.3.1 The characteristics of AS

• Define the AS curve

  The sum of all the industry supply curves in the economy

  
  

  It represents the total quantity of goods and services that producers in an economy are willing and able to supply at different price levels, ceteris paribus.
• What does the AS curve show?

  -It shows the level of output in the whole economy at any given level of average prices

  
  

  -It shows the quantity of real GDP which is supplied at different price levels in the economy
• Why does AS slope upward in the short run?


  -In the short run, it's assumed that the prices of factors of production (e.g money wages) are constant

  
  

  -At a higher price level, producers are willing to supply more because they can earn more profits

  
  

  -Higher prices can temporarily increase profit margins, leading firms to increase production.
• Why is AS vertical at the full-employment level of output (potential GDP)?


  In the long run, all prices, including wages, are flexible.

  
  

  Output is determined by factors such as technology, resources, and institutions, not by the price level.
• What is aggregate supply?

  the total supply of goods/services produced within an economy at a specific price level at a given time
• What causes Movement Along the AS Curve

  Caused by a change in the price level
• What causes shifts in the AS curve


  Caused by changes in non-price level factors affecting supply
• SRAS shifts

  Rightward Shift: Indicates an increase in aggregate supply. Causes include reductions in production costs, technological advancements, or improvements in productivity.

  
  

  Leftward Shift: Indicates a decrease in aggregate supply. Causes include increases in production costs, supply shocks (e.g., natural disasters), or reduced productivity.
• LRAS shifts


  Rightward Shift: Reflects long-term economic growth, such as increased capital stock, technological progress, or an increase in the labour force.

  
  

  Leftward Shift: Reflects a decrease in an economy's productive capacity, such as due to destruction of capital or a decrease in the labour force.
• Relationship Between Short-Run AS and Long-Run AS (1)

  SRAS:

  -Prices of some inputs do not adjust immediately

  
  

  -Firms respond to higher prices by increasing output since they have higher profit margins

  
  

  -SRAS can be influenced by temporary factors like changes in production costs or expectations
• Relationship Between Short-Run AS and Long-Run AS (2)

  LRAS:

  -All input prices are flexible, and the economy is at full employment

  
  

  -Reflects the economy's maximum sustainable output, given its resources and technology.

  
  

  -Determined by factors like labour force size, capital stock, and technological innovation.
• Connection between SRAS and LRAS

  In the short run, deviations from full employment can occur, causing the SRAS to shift.

  
  

  In the long run, the economy adjusts to its potential output level, reflected by a vertical LRAS curve.
• Key economists for AS

  John Maynard Keynes: Emphasised the role of aggregate demand in influencing economic output and employment. Introduced the concept of price stickiness, which underpins the upward slope of the SRAS curve.

  
  

  Milton Friedman: Highlighted the importance of expectations in the adjustment of prices and wages. His work on the natural rate of unemployment influences the understanding of the LRAS curve.