2.3 aggregate supply

    Cards (38)

    • Aggregate supply
      The volume of goods and services produced within an economy at a given price level
    • Aggregate supply curve
      Shows the relationship between real GDP and average price levels
    • SRAS curve
      • Curves upwards because at a higher price level, producers are willing to supply more in order to earn more profits
    • Movements along the SRAS curve
      Caused by change in price level only - due to changes in aggregate demand
    • Expansion
      Increase in aggregate demand
    • Contraction
      Fall in aggregate demand
    • Shifts in AS curves
      Caused by changes in conditions of supply - any factors that affect SRAS (change in cost of raw materials, exchange rates, and tax rates)
    • Short run
      When at least one factor of production is fixed - can't be changed
    • In the short run, money wage rates, factor prices, and state of technology are fixed and can't be changed
    • What happens on the AS curve in the short run
      1. If a business wants to increase production, they may increase hours of work for workers - not necessarily add more workers fulltime or hire more
      2. Firms may hire temporary workers, or overtime workers
      3. Wages stay the same, marginal cost per good rises, as business is paying more in wages for every good they produce - this is passed to consumers as increased pricing
    • Short run AS
      Less responsive to change (more elastic)
    • Long run
      When all factors of production are variable
    • Short run vs long run
      Short run = when 1 factor of production is fixed, long run = when all are variable
    • Interest rates fall
      Increase in investment = increase in LRAS = increase in capital stock
    • Taxes fall
      Increase in SRAS - costs less to employ a worker, costs less to supply a given quantity
    • Competition policy increases
      Increased efficiency = improved productivity = increase in LRAS
    • Education improves
      More skilled workers = more efficiency = LRAS increase
    • Short run aggregate supply (SRAS)

      The supply of goods and services in the short run, which is affected by changes in the cost of production
    • Causes of shifts in SRAS
      • Change in cost of raw materials
      • Changes in exchange rates
      • Changing of tax rates
    • Change in cost of raw materials
      1. Increase in cost of raw materials
      2. Increase in production costs
      3. Shift SRAS to the left
      4. Costs more to make the same amount of goods
      5. Business will increase prices to make more goods
    • Example of SRAS being affected by cost of raw materials
      • Oil prices determine SRAS level because they affect costs for almost all business
    • A weaker pound
      Imports will increase, causing SRAS to decrease
    • A stronger pound or currency
      Price of imports will reduce, so imported goods will be cheaper, reducing business costs
    • The inflation the UK experienced after Brexit was caused by fall of the pound which increased import prices, leading to cost push inflation
    • Taxes increase

      Cost of production increases, causing fall in SRAS
    • Subsidies
      Decrease costs, shifting SRAS curve to the right
    • Supply side shocks
      Significant changes in any of the factors affecting SRAS
    • Imports
      Money coming in
    • Exports
      Money going out
    • Long run aggregate supply
      The maximum amount of goods and services that can be supplied in the long run
    • Supply cannot be increased in the long run
    • Reason why supply cannot be increased in the long run
      • There's a limit on the amount of labour and machines available
      • Once labour productivity is maximised, it can't be increased
    • Shapes of LRAS curves
      • Keynesian LRAS curve
      • Classical LRAS curve
    • Classical LRAS curve
      It shows that in the long run, all factors of production are fixed - the economy is fully employed
    • The market is in disequilibrium
      The market will correct itself and move towards equilibrium, where this is maximum potential, economy is at its productive potential, resources are fully employed
    • Keynesian LRAS curve

      Keynes disagreed with the classical LRAS and came up with his own LRAS, as he believed the economy can be in disequilibrium for 20-30 years
    • Factors influencing long run aggregate supply

      • Changes in quantity and quality of factors of production
    • Main factors influencing long run aggregate supply
      • Technological advances
      • Changes in productivity
      • Changes in education and skills
      • Changes in government regulations
      • Demographics changes and migration
      • Competitive policy
    See similar decks