2.3 Aggregate Supply Flashcards
(5 cards)
What is aggregate supply?
The volume of goods and services produced within the economy at a given price level
It indicates the ability of an economy to produce goods and services and shows the relationship between the real GDP and the average price levels
Why is the SRAS curve upward sloping?
● In the short run, if a business wants to increase production they need to increase the hours of work their employees do
● They will not necessarily want to employ more full-time, permanent staff as they be committed to them and have to potentially sack them if sales fell later, which would create a bad reputation and be expensive (redundancy packages)
● Firms may decide to take on temporary workers or get present workers to work overtime, which would entail offering some form of incentive eg bonuses or increased rate of pay for overtime
● Even though basic wage rates have stayed the same, both the average and marginal cost of labour per good produced will rise. This would be passed on to the consumer in terms of increased prices
What factors can influence SRAS?
● changes in costs of raw materials and energy
● changes in exchange rates
● changes in tax rates
What factors can influence LRAS?
● technological advancements
● changes in relative productivity
● changes in education and skills
● changes in government regulations
● demographic changes and migration
● competition policy
How can government regulations influence LRAS?
● They can increase the size of the workforce. Eg Stay at home mums can be enticed back to work by free childcare at pre-school, unemployment can be decreased by reducing benefits. They can change the working age which will expand the workforce as more people are able to work
● Government policy can increase research and development as they can offer tax breaks to businesses who invest money into research
● Make it easier to set up businesses and increase incentives to be entrepreneurial (i.e. lower corporation tax) which would increase companies, jobs and output
● In general, high regulation on businesses will limit LRAS as it will increase costs and the time taken to undertake tasks, which will reduce output.
