LS4 - Aggregate Supply

Question 1

Aggregate supply

Answer 1

Total amount of goods and services that firms in the economy are willing to supply at a given price level in an economy in a year

Question 2

SRAS curve

Answer 2

As its upward sloping from left to right, indicating that when the price level increases, firms in the economy as a whole are willing to supply more

Question 3

Shifts in AS curve caused by

Answer 3

If the costs of production rise, the AS curve shifts to the left. This could be caused by an increase in oil prices causing a rise in the production costs of firms.

If costs of production fall then AS curve shifts to the right. This could be caused by a fall in raw material prices

Question 4

Factors influences SRAS

Answer 4

Changes in cost of raw materials- if cost of electricity rises, the cost of production of almost everything rises, AS decreases which is shown by curve shifting to the left.

Changes in exchange rates- if exchange rate of the point increases in value against other currencies than imports become cheaper and LRAS increases

Changes in tax- if corporation tax increases, increases cost of production of all firms in an economy by taking a larger chunk out of profits reducing profit margins

Question 5

What is assumed in SR

Answer 5

In the short run, capital is fixed. This is because firms would not be able to build a factory in the short run. Therefore in the short run it is assumed that at least one factor of production would be fixed, but firms can alter other factors of production eg. Labour.

Question 6

LRAS

Answer 6

LRAS is a concept which refers to the output that an economy can produce when USING ALL ITS FACTORS OF PRODUCTION, therefore when operating at full employment. LRAS shows the level of production that an economy is capable of producing if all factors of production are used to their full potential.

Question 7

Factors affecting LRAS

Answer 7

If there is an increase in the quantity of quality of factors of production, this can increase the productive capacity therefore LRAS will be shifted right.

If there is a decrease in the quantity or quality of factors of production, this can decrease productive capacity, therefore LRAS would be shifted left.

Question 8

Classical vs Keynesian LRAS

Answer 8

Classical LRAS curve vertical as markets tend to correct themselves quickly when pushed into disequilibrium by some shock
Keynesian argue there are times when markets have failed to clear for long periods of time so LRAS is horizontal then curves up