Aggregate supply

Definition

the total amount of goods and services that all industries in the economy will produce at every given price level

Diagram and why its upward sloping - SRAS

As price rises, firms make more profit while the nominal wages are fixed in the short run. Firms produce more to make more profit, causing the whole economy to produce more.

What causes shifts in SRAS

• changes in resource prices - wages increase - inward shift, oil cost decreases, outward shift

• taxes - increased taxes - increased costs - inward shift

• supply shocks - hurricanes, floods - inward shift

SRAS shift diagram

1 FOP is fixed (land or capital)

LRAS - classical vs Keynesian

Classical - perfectly inelastic

Keynesian - becomes inelastic at full employment YFE

increase and decrease in costs on SRAS

increased costs - leftward shift

decreased costs - rightward shift

Classical LRAS

Why is the LRAS perfectly inelastic

• no unemployment of resources as markets will clear so firms provide the maximum at every price level

• shows the productive capacity of the economy

Keynesian LRAS

Elastic - high levels of unused FOP like unemployment

Middle - FOP become scarce - higher costs lead to higher prices

Inelastic - Full employment of resources

Shifts in LRAS

• represent economic growth

• quality and quantity of FOP shifts curve

land - discovery of new resources - fertilisers

labour - increased birth rate and immigration - education and training

capital - investment - technological advancements