LS4- Aggregate Supply

Question 1

Aggregate supply

Answer 1

• shows the relationship between price level and output
• sum of all industry supply in the economy

Question 2

SRAS

Answer 2

SRAS- period in which at least one factor of production is fixed
- in the short run, SRAS curve is upwards sloping but as output increases, so does the cost of production, and hence price level increases
- but price increase is small, compared to larger increase in output, so PES is elastic

Question 3

Shifts in SRAS

Answer 3

• Wage rates- rise in wage rates => rise in average price level=> increase in the cost of production so firms respond by increasing prices, curve shifts up
• Raw material prices- fall in raw material prices- decrease in average price level => fall in cost of production- firms respond by decreasing prices, curve shifts down
• Taxes- increase in tax- increase in prices => increases tax burden on firms and consumers, SRAS shifts up
• Exchange rates- fall in exchange rates increases price of imports, increases in prices throughout the economy, SRAS shifts up
• Productivity- improvements in labour force, decreases costs in short run, so SRAS shifts down

Question 4

LRAS

Answer 4

Long Run AS -the maximum level of output an economy can produce using all factors of production at sustainable levels ; the productive potential of the economy
LRAS curve is vertical, showing maximum production potential of an economy, where there are no underutilised resources

Question 5

Shifts in LRAS

Answer 5

Improvements in CELL
* Labour productivity - improvements in skills and education of workforce, increase in LRAS
* Size of workforce - increase in immigration of working age individuals increases LRAS, aging population decreases LRAS
* Infrastructure - improvements in infrastrcture such as new roads, easier for firms to transport goods and materials, saves money, increases LRAS
* Technology - improvements in tech can increase capital productivity
* Investment - increased spending on tech, R&D can improve productivity, increasing LRAS
* Economic incentives - improvements in economic incentives can increase AS, such as lowering income tax, to reduce unemployment