Aggregate Supply

Question 1

what is aggregate supply?

Answer 1

Aggregate supply measures the volume of goods and services produced each year. AS represents the ability of an economy to deliver goods and services to meet demand

Question 2

what is short cut aggregate supply?

Answer 2

Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g. wage rates and the state of technology are held constant.

Question 3

what is long cut aggregate supply?

Answer 3

The price level begins by rising fairly slowly. However, the output (amount of supplies) increases significantly. The reason for this is that firms have large factories that are underused towards the bottom end of the line. Make a few more = use your spare capacity so this does not take much incentive to increase output with little increase in price.
Alternatively, the other end of the curve shows that when a company is reaching full capacity, they need a higher incentive to increase production as they may not be capable.

Question 4

short run aggregate supply curve?

Answer 4

A change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, we see an expansion of SRAS; if AD falls we see a contraction of SRAS.

Question 5

what three things cause a shift in the position of the short run aggregate supply curve?

Answer 5

1) Employment costs e.g. wages, employment taxes. Unit labour costs are also affected by the level of labour productivity
2) Costs of other inputs e.g. commodity prices, raw materials. The exchange rate can affect the prices of key imported products
3) Impact of government e.g. environmental taxes such as carbon duties & business regulations which affect the costs of production

Question 6

what are the main causes of shifts in aggregate supply?

Answer 6

1. Changes in unit labour costs - i.e. labour costs per unit of output
2. Changes in other production costs: For example rental costs for retailers, the price of building materials for the construction industry, a change in the price of hops used in beer making or the cost of fertilisers used in farming.
3. Commodity prices Changes to raw material costs and other components e.g. the prices of oil, natural gas, electricity copper, rubber, iron ore, aluminium and other inputs will affect a firm’s costs
4. Exchange rates: Costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas
5. Government taxation and subsidies