Aggregate Supply (L4) Flashcards
(21 cards)
What can cause a shift is the short run aggregate supply curve
Wage rates Raw material prices Taxation Exchange rates Productivity
Wage rates (LRAS)
Increase in wage rates= higher production costs for firms so prices may increase. (Upward shift)
Raw material prices (effects on SRAS)
Fall in price of raw materials = lower industrial costs so prices would be lower, downwards shift
Taxation (effects on SRAS)
Increase of tax burden on industry increases costs so SRAS goes upwards
Exchange rate
Rate at which one currency in exchanged for another,if it falls, the price of imported good rises. Shifts SRAS curve upwards.
Productivity (SRAS curve)
Productivity is output per unit employed. Capital productivity is output per unit of capital employed. Increase in productivity increases long run supply but reduces costs of production in short run so SRAS downwards.
LRAS curve
Level of output shown by the trend or rate of growth in an economy. It shows the level of full capacity output of the economy.
Factors affecting LRAS (10)
Technological advances Changes in relative productivity to competing economies Changes in education + skills Changes in government regulations Demographic changes and migration Competition policy Enterprise and risk taking Factor mobility Economic incentives Institutional structure of the economy
Tech advances (LRAS)
Allows new products to be made, increases productivity so shifts right
Changes in relative productivity to competing economies (LRAS)
Increase in productivity (UK) relative to other world economies encourage production of good in UK. Firms invest so shifts right
Changes in education + skills (LRAS)
Raises productivity (output per worker) increases LRAS
Changes in government regulations
Can lead to increase in LRAS if they help businesses (encouraging more entrepreneurs to create companies)
Demographic changes and migration
Population changes that increase size of workforce increase LRAS eg immigration of working age people
Competition policy
Government policies that increase competition between firms increase LRAS . Forces firms to be more productive and reduce costs. But sometimes less competition encourages investment
Enterprise and risk taking (LRAS)
More firms increases output and encourages competition so increases LRAS
Factor mobility
Increases with LRAS
Economic incentives
Improving them can increase LRAS (tax incentives for unemployed people so they have to work reduces unemployment)
The institutional structure of the economy (LRAS)
Political system, laws and educational system, banking system, etc. Determine how an economy works
Describe the classical LRAS curve
Vertical
Based on classical view that markets tend to correct themselves when pushed into disequilibrium. In the long run, product markets like for oil or food and factor markets like labour will be in equilibrium so no resources are unemployed.
Describe the Keynesian LRAS curve
Curved
They point out that there have been times where markets failed to clear for a long time. Developed during the Great Depression (1930s) when large scale unemployment lasted a decade and if not for WW2 it would’ve lasted longer
In theory, unemployment should lead to a fall in wages. Why hasn’t it?
Too much supply of labour means price of labour falls but there’s a minimum wage in place, trade unions might fight to maintain wage levels. High unemployment could be in an area while there’s full employment in another. Lower wages could demotivate staff so firms might not want to lower them. So there’s persistent disequilibrium in the long run, so there’s no pressure on prices when output expands.
