2.3 Aggregate Supply Flashcards
(15 cards)
What is aggregate supply (AS)?
AS is the total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in a given period.
What is short-run aggregate supply (SRAS)?
SRAS shows planned output when only the prices of final goods and services change, while input costs (like wages and raw materials) are fixed.
What causes a shift in the SRAS curve?
Changes in wage rates
Changes in raw material or commodity prices
Changes in exchange rates
Changes in business taxes
Changes in productivity
Why does the SRAS curve slope upwards?
Because, in the short run, higher prices for output make production more profitable, encouraging firms to produce more.
What is long-run aggregate supply (LRAS)?
LRAS shows the potential output of the economy when all resources are fully employed.
What are the two views of the LRAS curve?
Classical view: LRAS is vertical — output is fixed at full employment
Keynesian view: LRAS can be horizontal (spare capacity), upward-sloping, or vertical (full employment)
What causes a shift in the LRAS curve?
Changes in productivity
Changes in education and skill levels
Changes in labour force size
Technological advances
Investment in infrastructure
Government supply-side policies
What is the difference between a shift in SRAS and a shift in LRAS?
A shift in SRAS is caused by changes in costs of production (e.g. wages, taxes).
A shift in LRAS is caused by changes in the economy’s productive capacity (e.g. improvements in technology, education, infrastructure).
Why is a shift in LRAS important?
It represents long-term economic growth and the ability to produce more without causing inflation.
What is a supply-side improvement?
An increase in productive potential due to factors like better education, innovation, or investment — can be caused by private sector or government.
What are examples of supply-side improvements?
Investment in education and training
Development of new technologies
Increased labour market flexibility
Improved healthcare
Efficient infrastructure (e.g. transport, broadband)
What happens when AD increases and SRAS is upward sloping?
Output and the price level both rise.
What happens when AD increases and the economy is near full capacity (vertical LRAS)?
Only the price level rises — output cannot increase further.
What does a rightward shift in LRAS show?
An increase in an economy’s long-run productive potential — i.e. long-run economic growth.
What does a leftward shift in LRAS show?
A decrease in the economy’s capacity — e.g. due to emigration, natural disaster, or a fall in investment.
