2.3 Aggregate Supply Flashcards
(22 cards)
What does the Aggregate Supply (AS) curve show?
The quantity of real GDP supplied at different price levels in the economy.
Why is the Short-Run Aggregate Supply (SRAS) curve upward sloping?
At a higher price level, producers are willing to supply more because they can earn more profits.
What leads to movements along the AS curve?
Changes in the price level due to changes in Aggregate Demand (AD).
What happens to SRAS if AD increases?
There is an expansion in SRAS, from Y1 to Y2.
What happens to SRAS if AD falls?
There is a contraction in SRAS, from Y1 to Y3.
What is the difference between short run and long run in economics?
In the short run, at least one factor of production is fixed; in the long run, all factors are variable.
What does the short run aggregate supply curve (SRAS) represent?
The planned output of an economy when prices change, with constant production costs and productivity.
How does the long run aggregate supply curve (LRAS) differ from SRAS?
LRAS shows potential supply when prices and costs can change; it is vertical in the classical model.
What does the vertical LRAS curve indicate?
Supply is assumed not to change as the price level changes.
What factors influence short-run AS?
Changes in costs to businesses, such as raw materials, currency strength, and tax rates.
What effect does a rise in raw material costs have on SRAS?
It decreases SRAS from SRAS1 to SRAS2.
How does a stronger currency affect SRAS?
It reduces business costs, shifting the AS curve outwards from SRAS1 to SRAS2.
What is the Keynesian view of long-run AS?
The price level is fixed until resources are fully employed; output can increase without affecting price level until then.
What happens once resources are fully employed in the Keynesian model?
An increase in output will be inflationary, raising the price level.
What does the Classical view suggest about long-run AS?
Output is fixed at each level; changes in AD only affect the price level, not national output.
What factors can influence long-run AS? (6)
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
How do technological advances influence long-run AS?
They allow the economy to produce goods in larger volumes or improve quality.
What is the impact of changes in education and skills on long-run AS?
They improve human capital quality, increasing productivity and variety of goods/services produced.
What is the effect of excessive government regulation on productivity?
It could limit how productive and efficient a firm can be, referred to as ‘red-tape’.
What is the impact of net inward migration on long-run AS?
It increases the size of the labor force, enabling higher output.
How does competition policy affect long-run AS?
It encourages firms to be more efficient and productive to remain competitive.
True or False: Many factors affecting LRAS are microeconomic factors.
True
