Aggregate Supply

What is Aggregate Supply?

Total quantity of planned output in an economy over a period of time with the given factors of production

What does the SRAS curve assume is fixed?

Cost rates

Why are costs fixed?

Wages and rents are in long term contracts

Why does price cause the SRAS curve to slope upwards?

• Rises in price maximises profit

• Firms incentivised by higher prices to increase supply

What do firms do to increase supply?

Use spare capacity (machines, labour) more - overtime etc without increasing costs per unit

What causes the SRAS curve to shift?

Changes in cost of inputs (per unit - wage increases etc)

What 3 things could cause SRAS to shift inwards?

• Rise in price of raw materials

• Energy and unit labour costs increasing

• Fall in labour productivity

What 3 things from the government cause shifts in SRAS?

• Size of government subsidies

• VAT, environmental and employment taxes (NI)

• Cost of imported resources (exchange rate)

What two things is the UK a net importer of?

Oil and coal

What does the LRAS curve look like on a classical diagram?

Straight vertical line - perfectly inelastic

Why is this the case?

In the Long run there is no unemployment of resources (spare capacity) so supply is at maximum level and will not change due to price

What occurs at the vertical point on the Keynesian as curve?

Full Employment Output

What does it mean if the country is producing at at the flat bit?

Working below full capacity - widespread employment

What causes the curved line in the Kenysian diagram?

Elasticity

What does high spare capacity make SRAS?

Elastic

Why is this the case?

A rise in AD can be met quickly by an increase in output

Why does elasticity of LRAS fall as output increases?

• Spare capacity declines

• Resource shortages e.g skilled labour becomes scarcer

What is the economy working at when SRAS becomes perfectly inelastic?

Full capacity

What is another term for LRAS?

Productive potential

What affects LRAS?

Factors of production

How can labour increase LRAS?

• Increase in labour supply

• Increase in labour productivity

How can capital goods increase LRAS?

• Increase in capital stock

• Advances in tech - capital more productive

What 2 things can improve the efficiency/flexibility of inputs icreasing LRAS?

• Improved institutions

• Efficiency of allocation of inputs

What is productivity?

A measure of the efficiency of the production process

What is the equation involving productivity and output?

Factor inputs + factor productivity = output

What does a fall in labour productivity increase for firms?

Unit costs of production

What is achieved when AD intersects with AS?

Macroeconomic equilibrium