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Macroeconomics > 2.3 Aggregate Supply > Flashcards

2.3 Aggregate Supply Flashcards

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1
Q

What is AS

A

The volume of goods and services produced within the economy at a given price level

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2
Q

What does AS indicate

A

The ability of an economy to produce goods and services and shows the relationship between real GDP and avg price levels

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3
Q

What does short run AS look like

A

Diagonal line for SRAS

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4
Q

In the SR, what do businesses do to increase production

A

Hours of work of employees

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5
Q

What are issues with increasing SRAS

A

Employing additional staff full-time would be a large commitment that would lead to sacking if sales fell and so would create a bad reputation

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6
Q

What can firms do to increase SRAS that is effective

A

Temporary workers or overtime for present workers
(Some incentive is needed)

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7
Q

What happens if there are attempts to increase SRAS

A

Avg and marginal cost of labour increase per good produced

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8
Q

How elastic is SRAS

A

Elastic

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9
Q

What is the short run

A

Period of time where at least one FOP is fixed

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10
Q

What can’t be changed on the SRAS curve

A

Money wage rates, Prices of FOP (factor prices) and state of technology cannot be changed

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11
Q

What is a factor prices

A

The prices of the FOP

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12
Q

What is the long run

A

The period of time where all FOP are variable

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13
Q

What is the main cause of a shift in SRAS

A

Change in cost of production

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14
Q

How does change in cost of raw materials affect SRAS

A

Increase in cost of materials increases cost of production so SRAS shifts left

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15
Q

How does change in exchange rate affect SRAS

A

WPIDEC so SRAS decreases as production becomes more expensive

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16
Q

Why is exchange rate in terms of SRAS important especially in the UK?

A

The UK is heavily dependent on imports

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17
Q

What was the post Brexit inflation caused by

A

Pound depreciation which pushed up import prices and led to cost push inflation

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18
Q

How do changes in tax rates affect SRAS

A

Taxes increase production costs so they cause a left shift of SRAS
Subsidies shift the curve right

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19
Q

Difference between SRAS and LRAS

A

In the short run, supply can be increased by offering overtime but in the long run, there will be a limit on how much supply can be increased.

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20
Q

Why is LRAS limited

A

Limit on number of people and machines that are available once labour productivity is maximised, supply cannot be increased further.

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21
Q

Difference between LRAS and SRAS curves

A

Wage rates are variable and can change on the LRAS curve

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22
Q

What does a classical LRAS curve say about price level

A

AS is independent of P level and is determined by all FOP and quality of technology

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23
Q

What is LRAS a measure of

A

A country’s potential output and the concept is linked to the idea of a PFF which shows the productive potential of economy

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24
Q

What doles LRAS show

Study These Flashcards
A

The full capacity output (point on the PPF line)

25
What is possible in the SR that is NOT possible in the LR
Exceeding the max potential LRAS by allowing FOP to work overtime or not allow time for maintenance of machinery etc.
26
Why is it not possible to exceed the LRAS in the LR
Machines eventually stop working and workers want a break.
27
What is the vertical AS curve based on
The classical view that markets tend to correct themselves fairly quickly
28
What does the classical view of markets mean in terms of AS?
Although an economy can be increased disequilibrium, it will move towards equilibrium where all resources are employed and the economy is on its PPF (LRAS is vertical)
29
When did the classical view of LRAS change to the Keynesian curve
1930s
30
What did Keynes express about hte economy
If the economy can be in disequilibrium for 20-30 years then the LRAS curve cannot be vertical
31
LRAS is vertical as with the classical view as this is the max potential output with current resources and technology
32
What occurs below point B on the x axis on the Keynesian LRAS curve
The curve is no longer vertical as this means that wage prices and wages would fall when unemployment exists. This fall in wages makes it worthwhile empling people so employment would increase and the economy would return to full employment
33
What are “sticky downwards” wages
Unions prevent wages falling too low Businesses are unwilling to risk demotivating of their staff with lower wages Workers may be unwilling to work at such low wages There may be fully employment in one area but unemployment in another area (geographical immobility) Minimum wage
34
When does high unemployment occur on the Keynesian curve
Any point below A
35
When there is high unemployment, what happens to LRAS elasticity
It is perfectly elastic
36
What occurs to employment between A and B on the Keynesian curve
As employment rises, less people are seeking hobs so labour is becoming scarce to the point higher wages have to be offered
37
What occurs as you move from point A to point B on the Keynesian curve X axis
Higher wages lead to higher average price level, output becomes more price inelastic until it reaches point B where an increase in prices no longer affects output as the PPF has been reached
38
What does a right shift of LRAS mean
Economies are able to produce more (same as outward PPF shift)
39
How is LRAS affected by technological advances
Curve shifted to the right meaning more can be produced, Faster production so more goods can be produced with the same amount of resources More investment in technology in either new or current tech increases LRAS
40
How is LRAS affected by changes in relative productivity
The more productive the economy is, the more that will be produced with given resources.
41
What does productivity depend on
A range of factors including: Efficiency, skill of labour and tech
42
What happens if the UK is more productive than other countries
It will encourage production of that good (comparative advantage)
43
How does changes in education and skills affect LRAS
More skilled workforce is more employable and works quicker and more efficiently within their jobs so output per worker increases which shifts LRAS to the right
44
How can education affect LRAS
Causes increased occupational mobility of labour which decreases structural unemployment as people are more easily able to move to new jobs so more effect usage of resources
45
How does the government altering the size of the workforce affect LRAS
Encouraging people at home to go back to work to decrease levels of inactivity
46
Example of government enticing inactive members of the economy back into jobs
Stay at home mums being given free childcare at preschool
47
How can government reduce unemployment
Reduce benefits so those on them want to get a job
48
How does government changing the working age affect LRAS
Larger workforce so more resources so larger PPF
49
How does government increasing research and development affect LRAS
Tax breaks for businesses in research (good ideas can be lucrative)
50
How does government using business incentives affect LRAS
Lower corporation tax increases companies profit so more jobs will be available
51
How does government regulating businesses affect LRAS
Increases costs and time taken to do tasks so reduces LRAS
52
How does demographic change affect LRAS
Immigration > emigration leads to population growth so more workers so increases LRAS
53
What does the value and importance of immigration depend on in terms of LRAS
Skills and age of immigrants
54
How does age demographic affect LRAS
Old or young population means less people of working age so less G&S can be produced. Vice Versa applies
55
How does competition policy affect LRAS
Government can promote competition in markets forcing an increase in quality of goods or lower prices to compete.
56
How does pressure for competition affect LRAS
Businesses must become more efficient to be able to still profit
57
When can less competition be beneficial?
It may encourage investment and innovation such as copyright laws which means that a new idea can’t be copied so they do more research into more profitable G&S
58
What can be said about many of hte factors that affect LRAS
They are microeconomic, like competition policy, microeconomic changes have significant macroeconomic impacts if they are widespread enough

Macroeconomics (7 decks)

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