Short and Long Run Aggregate Supply Flashcards
Why is the SRAS curve upwards sloping (2)?
Because as average prices rise, the economy tends to produce more in the short run because:
1) Some parts of the economy, will see the rise in prices as a price incentive and increase their supply.
2) Firms’ costs (wages, raw materials, etc.) won’t respond quickly to the price rises, so firms will produce more and benefit from the price rises.
What are internal factors?
Factors that may be influenced by government policy, and are linked to the UK economy.
What are external factors?
Factors that create an external shock, often linked to the world economy.
What are, and explain, the internal factors affecting SRAS (4)?
1) Wage costs: If wages rise, e.g. due to an increase in the national minimum wage, firms’ costs of production rise, SRAS will decrease.
2) Production efficiency: If labour productivity increases, e.g. through new technology, SRAS will increase.
3) Taxation: An increase in VAT will see production costs rise for many products, reducing SRAS.
4) Import prices: The introduction of new tariffs will see costs of production rise, and SRAS to fall.
What are the external factors affecting SRAS (5)?
1) Natural disasters: Can decrease access to raw materials, increasing the costs of production and reducing SRAS.
2) Food prices: If the price of imported foodstuff rises used for supermarket products, they become more expensive to produce, reducing SRAS.
3) Energy prices: As the UK imports a lot of energy, a rise in energy prices would see a rise in the costs of production, and a fall in SRAS.
4) Oil prices: As oil is used by a vast range of industries in production and for transportation, an increase in oil prices would increase costs of production and reduce SRAS.
5) Exchange rates: A rise in the value of the pound will reduce import costs, reducing costs of production and increasing SRAS.
What is assumed in the long run (2)?
1) That the economy will move towards an equilibrium where all resources are used at full capacity/employment.
2) All factors of production are variable.
What are the two types of LRAS curves and what are the differences?
1) The classical LRAS curve: vertical
2) The Keynesian curve: L-shaped
How do technological advances influence LRAS (2)?
1) The internet has improved communications and access to trade, with starting a new business becoming easier and less expensive.
2) Productivity has been enhanced with technology in production, and factor mobility has increased (workers can operate from home).
How does specialisation influence LRAS?
If the UK specialises in a certain good, productivity of the good increases in comparison to that of another country. This will attract investment, and LRAS will increase as more output of the specialised good leads to an overall increase in economic output.
How do changes in education and training influence LRAS?
By investing in education and training, labour productivity will increase in the long run as workers will be more skilled and knowledgable.
How do government regulations influence LRAS?
By making it easier for entrepreneurs to start new businesses, giving support to businesses and reducing regulations, it easier to operate and run businesses. Vice versa.
How do demographic changes influence LRAS?
If the size of the population increases, e.g. due to a rise in migration, so will the size of the workforce, increasing output and therefor LRAS. However, an ageing population can reduce the productive capacity of an economy if the number of people of working age falls.
How does competition policy influence LRAS?
In free market economies, governments encourage competition between firms through regulations incentivising open competition. In order to compete, firms must become more productive/efficient, leading to increased output in the economy.
What is the long-run impact of an increase in AD on the economy illustrated by the classical model?
Only the equilibrium price increases, as real output is already at full capacity. This means inflation occurs.
What are the long-run impacts of AD on the economy illustrated by the Keynesian model (3)?
1) When the economy is not at full capacity (e.g. in a recession), an increase in AD will increase output but have no effect on prices.
2) As the economy grows nearer to full capacity, an increase in AD will increase both price levels and output, as factors of production become harder to come by.
3) When the economy is at full capacity, an increase in AD will purely result in an increase in price levels.
