2.3 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 .
• 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