2.3 Aggregate Supply (AS)

Question 1

aggregate supply

Answer 1

• the total supply of goods / services produced within an economy at a specific price level at a given time

Question 2

movements along AS curve

Answer 2

• diagram 1
• it’s upward sloping as at a higher price level, producers are willing to supply more as they can earn more profits
• changes in GPL which occur due to changes in AD lead to movements along the curve
• if GPL rises, there’s an expansion in SRAS and if GPL falls, there’s a contraction in SRAS

Question 3

shift of the AS curve

Answer 3

• diagram 2
• caused by a change in the conditions of supply, e.g. costs of production or productivity changes

Question 4

relationship between short-run and long-run AS

Answer 4

• diagram 3
• SRAS;
• at least 1 FoP is fixed so it only covers the period straight after a change in PL
• shows planned output of an economy when prices change, whilst costs of production and productivity of factor inputs are kept constant (a change in those will cause a shift)
• upwards sloping as supply is assumed to be responsive to a change in price, which is reflected in the price level
• LRAS;
• shows potential supply of an economy in the LR, when prices, costs, and productivity of factor inputs can change
• show’s the economy’s productive potential, like the PPF
• vertical as supply is assumed not to change as price level changes

Question 5

factors influencing short-run AS

Answer 5

• changes in costs of raw materials and energy; a rise would increase costs for businesses and shift SRAS to the left
• changes in ER; a stronger currency reduces price of imports so this reduces business costs and causes a right shift
• changes in tax rates; an increase would increase business costs and cause a left shift

Question 6

classical LRAS view

Answer 6

• diagram 4
• believes output is fixed at each level as all factors of production in the economy are fully employed in the long-run
• there may be short-run output gaps in the economy, e.g. during a boom or recession, but it’ll self-correct and return to the long-run level of output, but at a lower price level

Question 7

keynesian LRAS view

Answer 7

• diagram 5
• suggests price level in the economy is fixed until resources are fully employed
• until then, there is spare capacity in the economy, so output can be increased without affecting price level
• once resources are fully employed, a rise in output will be inflationary as price rises

Question 8

factors influencing LRAS

Answer 8

• affected by changes affecting quantity / quality of FoP
• technological advances; the economy can produce goods in larger volumes or increase their quality
• changes in relative productivity; a more productive labour and capital input will produce a larger quantity of output
• changes in education and skills; improves quality of human capital, so it’s more productive, more able to produce a wider variety of products, more innovative and able to contribute to technological advances
• changes in govt. regulation; excessive (red-tape) can limit how productive and efficient a firm can be
• demographic changes and migration; net inward migration of working age people will increase size of labour force so the economy can increase output
• competition policy; stimulates efficiency and productivity so firms aren’t driven out of the market