2.3.1 Aggregate Supply Flashcards
Why is the AS curve upward sloping?
Because as the general price level increases, producing more goods becomes more profitable, i.e SPPU
What factors cause a movement along, and what factors cause a shift?
Cost of production causes a shift in the AS curve, lower costs shift it outwards and higher costs shift it inwards.
Price level causes a movement along.
What is the relationship between short and long run supply?
In the long run wages and technology could change whereas in the short run at least one factor of production is fixed. LRAS shows productive potential of the economy, linking to PPFs.
Identify and explain 3 factors of SRAS
An increase in wage rate - this increases costs of production for firms, which decreases profitability and finally should decrease output in SRAS.
An Increase in VAT - same effect ˆ
Commodity prices may rise - same effect ˆ
Define spare capacity
Spare Capacity is when a business is not maximising their output and they have extra capital.
Which diagrams illustrate spare capacity?
The Keynesian curve - the flat part
A PPF - anywhere inside the curve
Explain why the Keynesian curve is shaped like this?
It starts off flat as businesses are able to increase supply due to their spare capacity. As the slope starts curving upwards, output rises which will increase the price level. However labour becomes scarce and wages rise causing the curve to become vertical where the market is at maximum capacity.
Explain why the classical curve is shaped like this?
This diagram is applied when the market is already at maximum capacity resulting in a shift of the LRAS curve being the only way to increase output.
Identify and explain 6 factors that would shift LRAS to the right.
- An increase in migration
- Increase in quality of labour
- Technology improves
- Productivity increases
- Net investment (increases capital stock)
- Improvements in infrastructure
