2.3.1 + 2.3.2: Characteristics of aggregate supply and SRAS

What is aggregate supply

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

• It indicates the ability of an economy to produce goods and services and show the relationship between the real GDP and the average price levels

The AS curve

• In the short run, if a business wants to increase production they have to increase their employees work hours

• They will not necessarily want to employ additional permanent full time staff as they would then be committed to them and have to give redundancy packages if sales fell late

• Firms may take on temporary workers or get current workers do work overtime- would entail offering incentive of some sort e.g. bonuses

• Basic wage rates remain, however, the average marginal cost of labour per good will rise- this would be passed onto the consumer

• This is why the curve is upwards sloping

Elasticity in AS

• SRAS is likely to be elastic

• An increase in output by firms is likely to lead an increase in costs onto consumers

• However, the factor prices are constant meaning the increase in prices will be relatively small

• If demand falls, firm swill cut prices in an attempt to stimulate sales

• However, they will not be able to achieve much of a reduction because of constant prices and an unwillingness in the short run to lay of workers

Movements and shifts

• A change in price level will lead to a contraction or expansion (a movement along the curve)

• A shift in the curve is caused by a range of other factors

• These factors depend on whether it is the SSRAS or LRAS curve

Relationship between long and short run

• Short run is the period of time when at least one factor of production is fixed and cannot be changed

• On the AS curve, in the sort run, money wage rates, factor of production prices and the state of technology are fixed

• A change in these result in a shift of the curve

• In the long run, all factors of production are variable

• There is disagreement amongst economists on the shape of the LRAS

Factors affecting SRAS: Changes in the cost of raw materials and energy

• An increase in the cost of raw materials and energy increases the cost of production

• This means the SRAS curve will shift left a it will cost more to make the same amount of goods and therefore businesses will only produce this amount of goods if prices rise

• Oil prices are an important cost in determining the level of SRAS, since they affect costs for almost all businesses

Factors influencing SRAS: Changes in exchange rates

• A weaker pound will lead to an increase in the price of imports and this will cause SRAS to decrease as production becomes more expensive

• Stronger pound, cheaper immports and so SRAS increaes

• This is important in the uK which is imort dependent

• The inflarion the UK expeirences after Brexit was caused by the fall in th pound, which pished import prices up and led to cost-push inflation

Factors influencing SRAS: Changes in tax rates

• Taxes increase the cost of production and this they cause a fall in SRAS, shifting it to the left

• Subsidies shift the curve right as they decrease costs