2.3 Flashcards
(9 cards)
What is the definition of Aggregate Supply?
The volume of goods and services produced within the economy at any given price level
Why is the SRAS curve upwards sloping?
As firms are willing to supply more only at a higher price
What causes shifts and movements along the AS curve?
Movement is caused by a change in price level
Shift is caused by other factors
What is the difference between SRAS and LRAS?
SRAS is a period of time when at least one FoP is fixed and can’t be changed
LRAS is where all FoPs can change
Factors influencing SRAS
Change in tax rates - Taxes increase cost of production which causes a fall in SRAS, shifting to the left
Change in exchange rates - If pound becomes stronger, imports are cheaper so SRAS will increase. If pound is weak, the price of imports increase so SRAS will decrease as production is more expensive
Change in cost of raw materials - Increase in cost will increase cost of production so SRAS curve will shift left
When do supply side shocks occur?
When there are significant changes in any of these factors affecting SRAS and LRAS
What is the LRAS curve?
LRAS shows the full capacity output where all resources are fully utilised
Classical LRAS suggests economy will always return to full potential output hence the line is vertical
What is the Keynesian LRAS curve?
Elasticity of AS is dependent in part of the level of spare productive capacity at different stages of an economic cycle
We can be below the YFE point and increase production without inflationary pressure due to spare capacity of FoPs
What are factors affecting LRAS?
Technological advances - This will cause shift to the right as more can be produced
Changes in productivity - The more productive the economy, the more produced with given resources
Changes in education - A more skilled workforce will work quicker so output per worker increases and LRAS shifts right
Changes in government regulations - Makes it easier to set up businesses, increases research and development and increases size of the workforce
Migration - If immigration is higher than emigration, population will grow so more workers which increases LRAS
