Aggregate Supply Flashcards
(26 cards)
aggregate supply
total output produced by an economy at a given price level
how long is the short run
less than 6 months
how long is the long run
over a year to several years
why is the classical LRAS curve a straight line
In the long run economy will reach maximum capacity level of output all resources are fully utilised
how do changes in costs of raw material affect aggregate supply in the short run
reduction in costs of production means more can be produced at the same price level
how can external shocks affect AS in the short run
natural disaster or war can cause sudden scarcity of resources which reduces AS
how do changes in tax affect AS in the short run
reduction in corporation tax will increase productive capacity of firms and a reduction in income tax gives more incentive to work
how do changes to the exchange rate affect AS in the short run
strong pound makes imports cheaper so raw materials become cheaper and cost of production becomes cheaper so AS increases
why is the Keynesian LRAS curve flat to begin with
it is horizontal as AS is elastic because there is spare capacity in economy, output can be increased without an increase In price.
why does the Keynesian LRAS curve slope upwards
in the long run it will cost firms more to increase output as there is less spare capacity so price will increase swell until economy reaches full capacity and only price can be reached.
what is the natural employment level in the uk
4.5%
what does CELL stand for
capital
entrepreneurship
land
labour
what are the 3 causes of aggregate supply to shift
- changes in quantity of cell
- changes in quality of cell
- changes to productive efficiency
how do technological advancements influence LRAS
help production to be more efficient which increases maximum output and increases AS
how do changes in education influence LRAS
improvements in education help create a more skilled workforce which increases output per person so increases AS
how does migration influence LRAS
increases capacity of economy and AS by having increased supply and skill of labour
how do changes in government regulation influence LRAS
removal of red tape helps production to be more efficient so AS increases
how does competition policy influence LRAS
Government policy that promotes competition between business which drives them to produce higher quality goods or more efficiently which increases AS
how do improvements in healthcare affect LRAS
Workers will have less time off and be able to work into older age so the size and productivity of the workforce will increase which increases AS
where is macroeconomic equilibrium
where AD and AS cross
why do keynsian economists argue against increasing AS in a depression
there is already so much spare capacity in the economy so increasing AS will not change the equilibrium, there will be no increase to output
what do classical economists argue is needed to increase all main four economic policies indicators at the same time
Increase in LRAS as it results in an increase in output
How does an increase in AD affect output in the classical short run
increases output which increased derived demand for labour so unemployment reduces
How does an increase in AD affect output in the classical long run
output doesn’t increase as the economy is already at full capacity
