2.3.2 - Short run AS

Question 1

Explain why the SRAS curve is upward sloping

Answer 1

1.) If firms wish to increase their output they would have to pay existing workers more to work overtime as in the short run at least one factor of production is fixed (e.g. capital or labour)

. Firms increase price of goods and services to cover the increase in marginal cost per unit of output

2.) As price increases, the quantity supplied will also increase due to increased profit motive , indicating a positive relationship between price level and output.

Question 2

Name the five factors that causes a shift in the SRAS curve

THINK COSTS OF PRODUCTION

Answer 2

A shift in the SRAS curve when there is a change in the conditions of supply at a fixed price level :

. Wage rate

. Raw material costs

. Taxation

. Exchange rates

. Productivity

Question 3

Explain wages rates (factor)

Answer 3

. Wages are the most significant cost of production for businesses

. A rise in wage can occur due to higher minimum wages, anticipated inflation or low unemployment

. This increases the cost of production shifting the SRAS to the left from SRAS 1 to SRAS2

. This means that there is less short run aggregate supply at a specific price level

Question 4

Explain raw material costs (factor)

Answer 4

. If raw materials or commodities such as oil in price increase, cost of production for firms increase.

This reduces the level aggregate supply and shifts SRAS inwards from SRAS1 to SRAS2

Question 5

Explain Taxation (factor)

Answer 5

. If businesses taxes, such as VAT rises, this will immediately increase the cost of production for firms in the economy

. Some of this cost will be passed onto the consumers resulting in higher price, hence shifting SRAS inwards from SRAS1 to SRAS2

Question 6

Explain Prices of Imported commodities / raw material due to weak exchange rate

Answer 6

. If the value of the pound falls, it will weaken the exchange rate making imports dearer due to a weaker purchasing power

Firms who import raw materials or commodity will see an increase in their cost of production shifting SRAS to the left from SRAS 1 to SRAS 2

A strong exchange rate on the other hand will make imports cheaper when bought in foreign currency this for firms who import raw materials cost of production will fall shifting SRAS from SRAS 1 to SRAS 3

Question 7

Explain Productivity

Answer 7

. Labour productivity is the output per worker

. Labour productivity might increase due to a better-educated workforce

. Capital productivity might increase due to improved technology

. If this is the case, cost of production will be lower meaning a downward shift of the SRAS curve

Question 8

Define short run and long run

Answer 8

Short run - Where at least one factor of production is fixed (e.g. capital or labour)

Long run - All factors of production are variable

Question 9

Define Short - Run AS

Answer 9

. Shows the relationship between the average price level and real output (real GDP) in the short run AND assumes cost of production and productivity of factor inputs are kept constant (e.g. wage rates)