1.4 Aggregate supply Flashcards
What is aggregate supply?
-Quantity of goods and services producers are willing and able to supply at a given level of prices in a given time period
It requires the factors of production
How does AS differ in the long/short run?
Short run is the relationship between real GDP and general price level, graphed basically like a normal supply curve.
LRAS represents the maximum possible output in an economy, similar to a PPF when all factors of production are fully and efficiently employed. This maximum output is independent of the price level.
What factors influence AS?
- Wage rates - staff costs 60-70% of costs so rise in wages can reduce supply
- Exchange rates - firms who import - SPICED so depends if strong/weak
- State intervention and taxes - regulations add costs e.g. health legislations, content labels, environment, as well as taxes such as VAT or corporation taxes and business rates. Subsidies may reduce costs
- Supply side shocks - war, harvest, oil price, natural disaster
- Change in resources - wage cost per output, labour productivity, key resource prices
- Energy costs - oil gas and electricity
What can cause AS to shift in the long run
-Change in quantity of inputs available in the economy
- Migration
- Less retirement
- Decreased IMR
- Investment in capital and infrastructure
- Changes in productivity:
- Training
- Education
- Technological advances
- Management strategies
- Improved healthcare
- Reduced congestion
- Resources from rural to urban areas
- Improvements in services e.g. banking system
Give examples of changes to SRAS/LRAS
SRAS: oil price rise, exchange rates fall from Brexit, business rates rise, NMW rise
LRAS: population growth (migration/IMR), education and training, technological advancements, improved healthcare
What is the classical view and curve
They believe that YFe to be vertical as resources are always fully used in the long run and there are no price levels at which there is not full employment, so as demand rises prices shift up the vertical YFE/supply
The classical LRAS shifts left/right when there is an increase in productive capacity from growth
What is the impact of increased productivity?
Less inflation as unit costs fall if productivity rises faster than wages
Economic growth rises, more AS and AD
Unemployment lower in long run
Balance of trade improved as exports are more competitive and more AD into the circular flow
Spare capacity rise from extra in the short run
Business investment higher and business profits increased giving more resources to fund capital spending
Fiscal balance: gains in government reduce state spending
What is the sticky wages theory?
-Wages don’t change as quickly as we think when demand for labour changes as firms cannot afford to keep the workers and so make them redundant and thus leads to unemployment even though AD is met. This is because people area on contracts or fixed legal obligations such as trade unions or NMW so firms cut off the workers
What are the benefits and costs of migration
Benefits:
- Skills and productivity
- Size of labour supply
- Innovation
- Positive multiplier
- Reduced labour shortages
- Remittances sent home
- Tax revenues
Costs:
- Welfare costs and spending
- Displacement of domestic workers
- Social tensions
- Rising housing demand
- Poverty risk
- Economic leakage
- Depends on skill
- Depends on how easy to settle in
- May not stimulate capital spending by firms and government
- Depends on gains in innovation
- Depends on if they decide to stay longer
How does competition policy influence AS?
- Antitrust and cartel agreements reduce competition, breaking these down can improve AS
- Market liberalisation from large monopolies - deregulation, privatisation, breaking up markets
- State aid control - supporting industries
- Merger control
What are the advantages/disadvantages of automation?
Advantages:
- Quality improved
- Shorter working weeks
- productivity rises
- Safer working conditions
- lower costs for businesses
Disadvantages:
- Job losses
- Large capital expenditure
- Reduced flexibility
- Risk of depreciation and hacking
What are the impacts of education on LRAS?
- Skills put into production process
- Positive externalities made
- Skills may be focused on particular jobs e.g. nursing
- Education beyond secondary education helps growth
- Skills can be transferred to different occupations
How do demographic changes affect LRAS/
- Rising number of single person households over 40% by 2030
- Number of births 700,000 a year
- Life expectancy 83 for men and 87 for women
- Ageing population - number of 65-85 year olds rise by 39% by 2032
What is the Keynesian LRAS curve?
- Horizontal elastic section plateus as it is elastic as output can be increased without a significant change in price level
- Elasticity starts to fall as output increases, becoming increasingly difficult to raise output levels as spare capacity declines, diminishing returns, bottlenecks and resource shortages - skilled labour is scarce.
- AS becomes perfectly inelastic at full employment as output can no longer be increased so rising demand causes inflation as firms cannot physically output more
The difference between YFE and the output at current AD shows output gaps
This LRAS shifts left/right as normal when there is a shift in productive capacity
What is the Phillips curve?
Recurved curve showing the trade of between inflation and unemployment - negative relationship which curves downwards
As inflation falls, unemployment rises
