2.3.1 Characteristics of aggregate supply

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5 Terms

1
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AGGREGATE SUPPLY

  • volume of g and s produced w/in economy at a given price level

  • indicates the ability of an economy to produce g and s and shows relationship between the real GDP and the general price levels

2
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SHORT RUN AS CURVE

  • likely to be elastic

  • increase in output by firms is likely to lead to an increase in costs which leads to a rise in prices as they pass these costs onto consumers

  • but, bc the factor prices are constant, the increase in prices will be relatively small

  • if demand falls firms will react by cutting prices in an attempt to stimulate sales

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

<ul><li><p>likely to be <mark data-color="yellow" style="background-color: yellow; color: inherit">elastic</mark></p></li></ul><p></p><ul><li><p>increase in output by firms is likely to lead to an increase in costs which leads to a rise in prices as they pass these costs onto consumers</p></li></ul><p></p><ul><li><p>but, bc the factor prices are constant, the increase in prices will be <mark data-color="yellow" style="background-color: yellow; color: inherit">relatively small</mark></p></li></ul><p></p><ul><li><p>if demand falls firms will react by cutting prices in an attempt to stimulate sales</p></li></ul><p></p><ul><li><p>but, they will not be able to achieve much of a reduction bc of c<mark data-color="yellow" style="background-color: yellow; color: inherit">onstant prices and an unwillingness in the short run to lay off workers</mark></p></li></ul><p></p>
3
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MOVEMENT IN AS

  • change in price level will lead to a movement along the curve

  • contraction or expansion

4
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SHIFT IN AS

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

  • these factors depend on whether its the short or long run AS curve

5
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RELATIONSHIP BETWEEN SHORT AND LONG RUN

  • short run- period of time when at least one FOP is fixed

  • on AS curve, in short run, money wage rates, factor prices and state of tech are fixed; change causes a shift of the curve

  • long run- all FOPs are variable