Aggregate supply

What is aggregate supply?

Measures the total amount of goods and services produced each year in a given market

What is the difference between short run and long run aggregate supply?

SRAS shows total planned output when prices change but the price of productivity of factor inputs e.g. wage rates are the same

LRAS shows the total planned output when prices and average wage rate can change

What does long run aggregate supply measure?

It is a measure if a country’s potential output and is linked to the PPF

How are the long and short run aggregate supply curves different?

LRAS curve is more vertical - it does not change when general price level changes

SRAS curve is upward sloping - responsive to changes in aggregate demand reflected in a change in price level

What main factors cause a shift in the aggregate supply curve?

Changes in business costs

• Change in labour unit costs - increased wage rat or decreased productivity

• Changes in production costs

• Commodity prices - changes to raw materials

• Exchange rates on imported products

• Government taxation rules

• Shocks to production

• What external factors affect aggregate supply?

• World oil and gas prices

• Energy prices/costs

• Other mineral/metal prices

• Foodstuff prices

• Import tariffs and quotas

What can we use to remember why LRAS shifts to the right?

?²

Q² CELL

What does Q ²CELL (LRAS curve)

Quantity and quality of capital, enterprise, land and labour

• What factors can shift LRAS to thr right?

• Increased labour supply/mobility/productivity

• Increased investment e.g. R&D spending/machinery

• Infrastructure improvements - reduced long run costs (transportation)

• Advances in technology

What else does a LRAS curve represent?

Increase in potential GDP