2.3.1 + 2.3.2

Question 1

What is aggregate supply?

Answer 1

• aggregate supply is the quantity of goods and services that producers are willing and able to supply at a given price in a given time within an economy
• indicates to the ability of an economy to produce goods and services as shows the relation between real GDP and price

Question 2

What happens to SRAS when GPL rises?

Answer 2

Should stimulate an expansion of supply as prices respond to profit motive

Question 3

What happens when GPL is falling?

Answer 3

Production May contract

Question 4

What is the main factor causing shift in SRAS?

Answer 4

The factor resource cost in supplying goods and services

Question 5

Why is SRAS curve upward sloping?

Answer 5

because higher prices for goods and services make output more profitable. This enables businesses to expand their production by hiring extra labour and other resources

Question 6

What happens to SRAS elasticity when an economy has lots of spare capacity

Answer 6

Spare capacity means there are spare factors of production

• usually when it is emerging from a recession
• then SRAS is elastic and the output gap is negative

Question 7

How do changes in resource prices affect the SRAS?

Answer 7

a. Wage costs per unit of output e.g. arising from higher minimum wage.
b. Labour productivity
c. Key raw material and component prices such as glass, cement and rubber.
d. Energy costs such the world price of oil, gas and electricity & renewables.

Question 8

How do business taxes, subsidies, regulations and imported costs affect SRAS?

Answer 8

a. VAT, environmental charges/ employment taxes
b. Changes in the scale and size of government subsidies to certain industries
c. Business rates + costs of meeting business regulations and other laws

Question 9

External factors affecting AS

Answer 9

• world oil and gas prices
• energy prices/ costs
• other mineral/metal prices
• foodstuff prices
• Import tariffs/quotas

Question 10

Differences between Keynesian and (neo) classical views

Answer 10

• Keynesians do not tend to distinguish between short run and long AS, preferring instead to just consider AS as a whole. For Keynesians, is just one AS curve.
  • Neo-classical economists, however, do distinguish between the short run and the long run. Therefore, neoclassical economists will use a short run AS curve and a long run AS curve i.e. two curves.

Question 11

Explanation / reasoning for the Keynesian aggregate supply curve:

Answer 11

When spare capacity high = elastic SRAS: a rise in AD can be met easily by increased output and there is low chance of inflation
• When SRAS is perfectly inelastic, an economy is at full capacity (equivalent to being on the PPF boundary), further increases in AD are purely inflationary in the short run with little extra real output

Question 12

Elasticity of SRAS curve falls as output increases as:

Answer 12

• The amount of spare capacity declines
• Possibility of diminishing returns in production
• Resource shortages as the economy approaches full employment e.g. Skilled labour becomes scarce

Question 13

Elastic AS curve means?

Answer 13

Outward shift in AD can be met without increase in GPL (non inflationary growth)

Question 14

Inelastic SRAS curve means?

Answer 14

Outward shirt cause sharp rise in GPL as AS is inelastic - inflationary pressures

Question 15

Full employments effect on AS curve?

Answer 15

• When the AS curve become vertical, the economy has reached full employment of factor resources.
• Full employment is defined as a state of the labour market in which everyone who is willing and able to work at the current wage rate is in employment, excluding those who are frictionally unemployed

Question 16

Two separate curves for long run and short run is used by:

Answer 16

Neoclassical economists

SRAS shifts up or down if costs of production change

LRAS shifts left or right if the quantity/quality of factors of production change

Question 17

Short run definition

Answer 17

Period of time where at least one factor of production is fixed and can’t be changed

Question 18

How could a business increase production in the short run?

Answer 18

Need to increase hours/ increase productivity

• must incentivise these workers (bonuses)
• this increases the wages = increased costs

Question 19

Why would businesses not necessarily want to employ additional full time, permanent staff?

Answer 19

Will have to commit to them (expensive) and then sack them later when they wish to cut production which could lead to a bad reputation

Question 20

Why does increased supply in the short run lead to increased prices?

Answer 20

• business is paying more wages for every good they produce
• increased costs passed onto consumer to maintain profit margins
• rise in prices in sectors = rise in price level

Question 21

Why is the SRAS curve upward sloping?

Answer 21

Firms are willing to supply more but only at higher prices

Question 22

Why is SRAS likely to be elastic?

Answer 22

In the short run, output can be increased easily by paying overtime or incentivising higher productivity

• increase in output by firms leads to increase costs
• which leads to rise in prices
• increases in price are relatively small as factors of production are held constant

Question 23

What happens to SRAS when demand falls due to increased prices?

Answer 23

• firms cut prices, BUT
• will not be able to achieve much of a reduction due to constant prices and unwillingness in short run to layoff workers

Question 24

Long run definition

Answer 24

All factors of production are variable

Question 25

Factors that shift SRAS curve?

What do you notice about these shifts?

Answer 25

• wage rates: increased costs of production = increased prices
• raw material/ energy prices
• taxation
• exchange rate (imported materials)
• productivity

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