Aggregate supply

• Aggregate supply is the ​volume of goods and services produced within the economy at a given price level. It indicates the ability of an economy to produce goods and services and shows the relationship between the ​real GDP​ and the ​average price levels​.
• Factors influencing Short AS:

  • Changes in costs of raw materials and energy​
  • Changes in exchange rates
  • Changes in tax rates
• Factors influencing Long run AS:

  
  

  • Technological advances
  • Changes in relative productivity
  • Changes in education and skills
  • Changes in government regulations
  • Demographic changes and migration
  • Competition policy
• In the short run, supply can be increased by offering overtime but in the long run ​there will be a limit on how much supply can be increased. There is a limit on the number of people and machines that are available and once labour productivity is maximised, supply cannot be increased any further. On the LRAS curve, unlike the SRAS curve, wage rates are variable and can change.
• Competition policy: The government can promote competition between businesses and markets which will force them to improve the quality of their goods or lower prices.
• Demographic changes and migration: ​If immigration is higher than emigration, the population will grow and so therefore there will be more workers which will increase the LRAS. The value and importance of this immigration will depend on the age of the immigrants and their skills. 
• Classical

  In the long run, AS is ​independent of the price level and is ​determined by the level of all factors of production and the quality of technology​. The LRAS is a measure of a country’s potential output and the concept is linked to the idea of PPF; it shows the productive potential of the economy. 
• classical LRAS

  • In the short run it is possible for an economy to ​exceed the maximum potential LRAS by allowing factors of production to ​work overtime or not allow time for maintenance of machinery etc. However, this is ​not possible in the long run as machines will eventually stop and workers will want a break.
• Classical LRAS

  The vertical AS curve is based on the classical view that ​markets tend to correct themselves fairly quickly. This means although an economy can be in disequilibrium at any moment in time it will naturally move towards equilibrium position where all resources are employed and the economy is producing at its productive potential; on its PPF. This means LRAS is vertical.
• Keynesian: ​The classical view of the LRAS curve was agreed until the 1930s when Keynes expressed the view that if the economy can be in disequilibrium for 20-30 years, it can’t be correct to imply the AS curve is vertical. Keynes came up with his own LRAS curve.
• • Keynes thought this was true to an extent but wages tend to be ​‘sticky downwards’​. They will not fall below a certain level because:
  • businesses are unwilling to risk demotivation of their staff by offering low wages
  • there may be full employment in one area and unemployment in another area due to lack of labour mobility
  •  the minimum wage means wages cannot fall below a certain level.