2.3 AS Flashcards
(13 cards)
Aggregate Supply
-Total quantity of g+s in economy producers and willing and able to supply at different price levels
Short run vs long run
SRAS:
-upward sloping as prices of inputs (e.g. wages) are sticky
-and high prices can temporarily increase profit margins leading firms to increase production
LRAS:
-All inputs are flexible
-Output is not determined by price but quality and quantity of factors of production
Factors influencing SRAS: Changes in costs of raw materials and energy
-Increase in cost increases cost of production
-SRAS shifts inward
-e.g. 2008 oil price shock
Factors influencing SRAS: exchange rates
-Weak currency increases price of imports
-higher cost of production
-SRAS shifts inward
-PArticularly important in UK - heavily dependent on imports
-e.g. post-brexit pound depreciation - led to cost push inflation
Factors influencing SRAS: changes in tax rates
-Increases cost of production
-Shift SRAS left
Classical LRAS
-AS is independent of price level in LR
-Determined by quality and quantity of FOP
-Vertical at full employment
-Economy self-adjusts (wages and price level) to full employment so gov intervention is deemed unecessary
-In the short run it is possible for an economy to exceed the maximum potential
LRAS by allowing factors of production to work overtime or not allow time for
maintenance of machinery etc. However, this is not possible in the long run as machines will eventually stop and workers will want a break.
Keynsian LRAS
-Unemployment and idle capacity exists in economy
-In SR output can be increased without causing inflation until full employment is reached
-Gov intervention like fiscal policy can help achieve full employment without causing inflation in short-run
Horizontal: at low levels of output and employment firms can increase production without raising prices due to unused capacity and high unemployment - wages can be kept low
Upward slope: Increasing pressure on wages and prices as labour is becoming scarcer and firms want to attract the best workers
Vertical:Full employment and any further demand will only lead to higher prices not more demand
Factors influencing LRAS: technological advancement
-Increase productivity
-More output from same input of labour and capital
-e.g. modern day - streamlined communication
Factors influencing LRAS: Changes in relative productivity
-Increase in productivity in one sector can shift resources optimising overall efficiency of the economy
-If the UK is more productive than other countries it will encourage production of that good in the UK which increases investment - LRAS increases
Factors influencing LRAS: education and skills
-More skills make people more employable and work more efficiently
-Output per worker increases
-Improves occupational mobility of labour which decreases structural unemployment
Factors influencing LRAS: gov regulations
-Deregulation can increase efficiently
-Encourage stay-at-home mums to work by offering free childcare
-Reduce JSA to encourage working
-Tax breaks to businesses willing to invest into r+d
-High regulation limits LRAS as costs increase and time taken to do tasks increases
Factors influencing LRAS: demographic changes and migration
-High immigration increases pool of workers increasing LRAS
-Aging population shrinks workforce
Factors influencing LRAS: Competiton policy
-Promoting competition leads to higher productivity
-Businesses improve quality of their goods and improve efficiency to maintainn profits
-Low competition can also enhance LRAS as it enourages investment and innovation
