aggregate supply

define aggregate supply

the volume of goods and services produced within an economy at a given price level

what does the short run AS curve show

as prices in the economy rise, firms want to increase level of output. one factor of production is fixed

what are factors fixed in short run 3

1. contracts of employees means workers cannot be made redundent in the short run

2. lanning permission

3. funding investment is difficult

what must be inelastic for inflation to increase

in the long run, if AS is inelastic then an inc in AD will just increase the price level

how does the keynesian LRAS curve work

1. between AD 1 and 2, there is excess spare capacity within the economy, an inc in AD will only cause GDP to rise

2. between AD3 and 4 there are bottlenecks, this is because most of the resources have been used up so there is little spare capacity left. inc in AD will cause prices to rise and GDP

3. between AD 5 and 6, all unemployed resources have been used up and any further increases of AD will only cause inflation

what are two supply side shocks

1. costs of raw materials

2. exchange rates