Aggregate Supply Flashcards
What is AS?
This is the total number of goods and services that producers make and are willing to sell at a certain price in a given time.
What is SRAS?
It is a curve that shows the + relationship between the price level and the number of goods and services a firm is willing to provide.
What can determines the SRAS position?
It is determined by the cost of production that can be affected by supply side shocks. This can be either positive or negative shocks.
What are some supply side shocks that effect cost of production/SRAS?
1) Wages. As they increase, costs will go up and SRAS shifts left.
2) Raw material/ commodity prices. If they increase in costs, firms wont be able to provide as much. SRAS shifts left.
3) Oil prices. This is an important output. If expensive, SRAS shifts left.
4) Business taxes. If these go up, eg VAT, SRAS shifts left.
5) Exchange rate. If it is strong, its cheaper to buy raw materials abroad. If its weak, its more expensive
Explain classicals LRAS?
The LRAS curve is vertical as they argue output is not influenced by price level.
They assume that firms are operating at full capacity in the long run, therefore there will be one level of output.
What can effect the LRAS position?
Quantity and quality of fops, productive efficiency.
Explain some factors that can shift LRAS?
1) Labour productivity. This can cause LRAS to shift right.
2) Investment. New capital and research
3) Infrastructure. EG: new roads can decrease cost, so firms can increase output. Workers can also get to work quicker.
4) Quantity of workers. Immigration increase can expand labour force.
5) Competition. Efficiency improvements.
6) Wars and pandemics.
Explain keynesians interpretation of LRAS.
They argue that LRAS is curved and that output is not at one level only.
They argue it is curved due to the level of spare capacity. EG: If we are in a recession, its possible to increase output without inflation since fop are not being used.
When the curve begins to slope upwards, price level starts to increase due to cost increases. Theres more pressure on existing fop.
When the curve is vertical, the economy is at full capacity.
Where is equilibrium for classical economist in the LR and SR?
In this SR, equilibrium is where AD=SRAS but dosent equal LRAS
In the LR, equilibrium is where AD=LRAS=SRAS
