Aggregate Supply Flashcards
(53 cards)
aggregate supply
the total amount of goods and services the whole economy can supply at every given price level
2 different aggregate supplies
- classical
- keynesian
classical aggregate supply 2 parts
- short run
- long run
short run definition
a period of time where all factor prices are fixed
short run aggregate supply curve
the total supply of goods and services at any given price level over a given period of time at a given wage rate
Variable output
Production can exceed productive capacity for short periods of time
causes real output to increase
when does variable output occur
when the economy is operating at a level that is close to the productive capacity for the economy
what are the effects of short run AS on curve
- price increases
- real output increases
Why does price increase in short run AS
production costs rise when Qs rises, so pay more overtime for workers…
- difficult and costly to engage external factors
Why does price increase in short run AS
- labour works more intensely - like overtime
- difficult and costly to engage additional factors (produce more)
- higher costs will lead to higher prices
- price increases less than real output
Why is SRAS curve slope upwards
this is because price and real output are direct and have a positive relationship
outward shift in SRAS curve
decrease in costs, causes AS shift to the right,
- real output stays the same
- price decreases
inward shift caused in SRAS curve
increase in costs causes AS shift to the left
- real output stays the same
- price level decreases
how are the changes in costs caused
- wage rates
- raw material price
- exchange rates
- indirect taxes / subsidy
how does exchange rates effect costs
stronger pound, imports cheaper, shift right
weaker pound, imports dearer, shift left
supply side shock
A sudden, unexpected and significant change in the costs of factors of production
long run AS definition
there is a limit to how much output can be produced
factors of long run AS
- cannot exceed capacity for a long time
- capacity doesnt depend on cost / price
- LRAS is perfectly inelastic as its independent of price
why is LRAS perfectly straight / inelastic
because real output cannot be exceeded so cannot change
only price can go up or down
full employment
the level of output where all available factors of production are engaged in the productive process
what is full employment labeled as on the x axis
Yfe - on x axis for real output
how can we show inactive resources using full employment
- FE represents maximum capacity
- but some resources won’t be catagorised as unemployed
- mean they are capable but not willing
= inactive resource
2 examples of inactive resources
A factory no longer in use
- A person choosing to not work, because they don’t need the money
Long run shifts
A change in the productive potential of an economy due to a change in the quantity and / or quality of a factor of production
