2.3 Aggregate Supply

Cards (28)

  • 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 .
  • The SRAS curve is upward sloping because at a higher price level, producers are willing to supply more because they can earn more profits.
  • Movement along the AS curve is caused by changes in the price level, and can be contractionary (decrease in price level) or expansionary (increase in price level)
  • SRAS curve :
    P1 to P2 : expansionary
    P1 to P3 : contractionary
  • Long run aggregate supply (LRAS): The maximum amount that firms will produce when all factors of production have been fully employed. This means that there is no spare capacity available. LRAS represents full employment output.
  • LRAS Curve :
  • Short Run Aggregate Supply (SRAS): The quantity of goods and services supplied over a short period of time with some factors of production fixed. In other words, it refers to the current state of the economy where some inputs cannot change quickly.
  • SRAS Curve is the graph that shows the relationship between the price of a good and the quantity demanded.
  • The short run is the period of time when at least one factor of production is
    fixed, whilst in the long run all factors of production are variable.
  • 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
  • Shows the relationship between real GDP and average price levels
  • In the short run, to increase production, businesses may increase the hours of work their employees do
  • Firms may opt for temporary workers, overtime, or incentives like bonuses to increase production
  • Even if basic wage rates stay the same, both the average and marginal cost of labor per good produced will rise
  • The short-run AS curve is likely to be elastic, meaning output is relatively responsive to a change in price
  • A change in price level leads to a movement along the curve, while a shift is caused by other factors
  • Factors influencing short-run AS:
  • Changes in costs of raw materials and energy can shift the SRAS curve
  • Changes in exchange rates can affect SRAS, with a weaker pound leading to decreased production costs
  • Changes in tax rates can impact the cost of production and shift the SRAS curve
  • Supply side shocks occur when there are significant changes in these factors
  • In the long run, there is a limit on how much supply can be increased due to fixed factors of production
  • Unlike the short run, wage rates are variable in the long run
  • Different shapes of long-run AS curve:
  • Classical view: AS is independent of the price level and determined by factors of production and technology
  • Keynesian view: LRAS curve is not always vertical due to sticky wages and other factors affecting employment and output
  • Technological advances, changes in productivity, education, government regulations, demographic changes, and competition policy can influence long-run AS