aggregate supply

• What is aggregate supply?

  It is the total amount of goods and services that all industries in the economy will produce at every given price level.
• What does short run aggregate supply refer to?

  It refers to the amount of output that industries will supply at any price level, with at least one factor of production being fixed.
• What is a key characteristic of the short run in production?

  At least one of the FOP is fixed.
• What happens if a larger level of output is to be produced in the short run?

  Firms will incur higher costs, such as paying overtime to staff.
• How do firms pass on increased costs to consumers?

  They pass on the increase in costs in the form of higher prices.
• What does a change in the price level paid by consumers indicate in relation to the SRAS curve?

  It is accompanied by a movement along the curve.
• What are supply side shocks?

  They are unexpected events that affect the supply side of the economy, causing the SRAS curve to shift in or out.
• Why is long run aggregate supply (LRAS) more significant to economists?

  Because it assumes all factors of production are variable.
• What are the two schools of thought regarding the LRAS curve?

  1. Classical (or monetarist) aggregate supply
  2. Keynesian aggregate supply
• What is the principle belief of Classical LRAS economists?

  They believe in the efficiency of market forces with minimal government intervention.
• Why is the Classical LRAS curve considered vertical?

  Because it is perfectly inelastic at the full employment level of output.
• What does the Classical LRAS curve imply about output and price levels?

  Output is based ey on the quantity and quality of factors of production and is independent of the price level.
• What are the three phases of the Keynesian Aggregate Supply curve?

  1. Phase 1: Perfectly elastic at low levels of economic activity.
  2. Phase 2: Increasing costs as factors of production become scarce.
  3. Phase 3: Perfectly inelastic at full capacity.
• What characterizes Phase 1 of the Keynesian AS curve?

  Producers can raise output without incurring higher costs due to spare capacity in the economy.
• What happens in Phase 2 of the Keynesian AS curve?

  Producers have to pay more to obtain scarce factors of production, leading to higher prices for consumers.
• What occurs in Phase 3 of the Keynesian AS curve?

  The economy is at full capacity, and output cannot increase further without technological improvements.
• What factors can move the LRAS curve?

  • An increase in the quality or quantity of factors of production.
  • Factors include land, labor, entrepreneurship, and capital.
• How can the quantity of land as a factor of production be increased?

  • Land reclamation
  • Increased access to resources
  • Discovery of new resources
• How can the quality of land be improved?

  • Technological advancements
  • Use of fertilizers
  • Irrigation
• How can the quality of labor be improved?

  • Education
  • Training
  • Re-training
  • Apprenticeship programs
• How can the quality of capital be improved?

  • Investment
  • Technological advancements
  • Research and development
• If a larger level of output is to be produced, firms will incur higher costs...

  The increase in costs will be passed on to consumers in the form of higher prices.

  
• Short run equilibrium

  the price level where all the output produced is consumed - cleared

  
• Classical LRAS (long run aggregate supply)

  The Classical LRAS is vertical because it’s perfectly inelastic at the full employment level of output

  
• Keynesian LRAS (long run aggregate supply)

  This change in elasticity to inelasticity depicts how resources are scarce.