Aggregate supply

Aggregate supply

The total goods and services all firms in an economy are willing and able to produce at, at a given price over a certain period of time

Characteristics of aggregate supply

• Based on COP, including rent wages, interest, profits

• As prices rise, firms are willing and able to produce more

Shifts in the supply curve

If COP rises, the AS curve shifts left/upwards or it decreases. e.g

• If the price of oil rises, firms will not be willing to supply unless they receive more money for the same output

• If investment falls, for example because interest rates have risen, then AS decreases

• If there are shortages for certain factors of production, then it will raise costs

SRAS

Short run aggregate supply

• The total planned output of all goods and services that firms are willing to produce at each price level, assuming fixed input costs in the short run

Shifts in the SRAS curve

Upwards sloping

The position of SRAS depends on costs of production

If there is an increase in COP, sras shifts left and vice versa

Costs of production

• Wages

• Raw materials

• Oil prices

• Business taxes

• Import prices

Import prices

For firms in the UK economy relying on imports:

A strong exchange rate means imports are cheaper

So firms that imports raw materials, COP decreases

Whereas a weak exchange rate, COP increases

Long run

A period of time where all factors of production are variable

Why is the LRAS curve vertical

To represent one level of output the economy will always produce at in the long run

LRAS

shows the maximum output an economy can produce when all resources are fully employed

shifts in LRAS

• When the quality or quantity of a factor of production increases/decreases

• An increase in productive efficiency

  • An increase in labour productivity, improves quality of labour shifting LRAS to the right

  • Increase in investment, (spending on capital goods) increases in tech, machine upgrades increases the quantity/ quality of capital which can reduce COP, and increase capital, and shift LRAS to the right, increasing output

  • Increasing infrastructure, new airports, new schools, hospitals etc increasing productive efficiency and capital stock

  • Increasing quantity of labour, immigration increasing

Keynesian supply curve

Keynesian economists dispute the idea there is a SRAS curve and LRAS curve

They think the shape is curved because of spare capacity

• If the economy is in deep recession where output is below full employment, then it is possible to increase production without there being an increase in inflation, because there is mass unemployment in factors of production