Aggregate Supply

Question 1

Define Aggregate Supply?

Answer 1

Total amount of Goods and Services firms are able + willing to supply in a year

Question 2

Why is the SRAS upwards sloping?

Answer 2

• Indicate when Price level ↑, Firms willing to Supply More

Question 3

Draw SRAS Diagram

Answer 3

X Axis - R. Output
Y Axis - Price Level
SRAS upward sloping –> - Indicate when Price level ↑, Firms willing to Supply More

Question 4

Describe the Keynesian AS Curve

Answer 4

• Drawn with a Horizontal (-) section where there is spare capacity and a Vertical section (I) at full employment
• Drawn on a curve

–> as PL (Price Level) ↑ firms willing to supply more, but is a point where firms reach maximum capacity e.g. full employment

Question 5

What causes a Movement along AS Vs. a Shift in AS

Answer 5

Movement Along
- Change in PL cause by Changes not related to AS e.g. in AD
–> e.g. ↑Consumption –> ↑Price Level

Shift
- Change to Cost of Production
- Cost↑ –> AS Shift Left / Inwards
- Cost ↓ –> AS Shift Right / Outwards

Question 6

Describe the SRAS + assumptions made?

Answer 6

• SRAS upward sloping (like S Curve)
• Assumes some resources e.g. capital equipment are fixed
  –> but possible to use resources intensively . more efficiently
• At Higher Price Level –> R. Output↑

Question 7

Describe the LRAS + Assumptions made?

Answer 7

• two types; Keynesian (Backwards L curve / slope) + Classical (Vertical live - perfectly inelastic)
• Assumes all Resources are variable

Classical
- Shift in AD no impact on R. Output as AS curve perfectly inelastic (if country in equilibrium)
- Economy self adjusting e.g. if unemployment, wages fall until full employment

Keynesian
- Output can ↑ without significant ↑Costs
–> Spare Capacity means there are unused resources even in Equilibrium e.g. Unemployment
–> Unemployment + recession need Gov intervention to fix

Question 8

What 4 Factors Influence SRAS?

Answer 8

• Cost of Raw Materials
  –> ↑Cost Raw Materials –> ↑Cost of Production –> SRAS↓ (shifts left)
• Exchange Rates
  –> Value of £↑ –> Cost of Imports ↓ –> Cost of Production ↓ –> SRAS↑ (shift Right)
• Tax Rates
  –> Cost of Production ↓ –> SRAS↑ (shift Right)
• Tariffs
  –> Tariffs on imports↑ –> Domestic firms Cost of Production↑ –> SRAS↓ (shifts left)

Question 9

List 5 Factors influencing LRAS?

Answer 9

• Technological Advances
  –> ↑Productivity –> ↓Cost of Production –> LRAS↑ (Shift Right)
• Education and Skills
  –> ↑Productivity –> LRAS↑ (Shift Right)
• Gov. Regulations
  –> e.g. Environmental Laws to reduce pollution –> tech changes –> LRAS ↓ (Shift Left)
• Demographic changes
  –> e.g. Ageing Population –> Dependency Ratio↑ –> LRAS ↓
• Minimum wage
  –> Min. Wages↑ –> Cost of Production↑ (SRAS ↓)
  –> Evidence says ↑Wages can ↑Productivity –> LRAS ↑ (Shifts Right)