Topic 2.8 - Short run aggregate supply (SRAS)

What is the equation for profit?

Income from sales (revenue) - costs of production

How can you increase profit?

By increasing revenue and decreasing costs of production

What would lead to supply decreasing?

Costs increase and profit decreases so costs per unit increase so not as much production can be made so firms close

What does the SRAS curve show?

The current level of supply in the economy

What does the LRAS curve show?

The maximum possible production in an economy

When does a movement along the SRAS curve occur?

When there is a shift in AD first

What does an increase in price and an increase in income lead to?

Higher profit

Approximately how many firms are there in the world?

5 million

What leads the SRAS curve to shift?

When there is a significant change in the cost of production

What is an example of a product that has a significant cost of production?

Oil

What are the 4 main causes of supply side shocks?

1. Labour costs

2. Raw material/energy prices

3. Exchange rates

4. Government indirect taxes especially VAT

What are the 2 types of supply side shocks?

Positive and negative shocks

What are increases in SRAS (shifts right) the result of?

Positive shocks

What are decreases in SRAS (shifts left) the result of?

negative shocks

What are both types of supply side shocks a result of?

Cost changes that affect the whole economy

Why do labour costs cause supply side shocks?

Widest impact is from a change in minimum wage and an increase will increase costs, producing a negative shock

Why do raw material and energy prices cause supply side shocks?

The most important of these is oil since almost all firms need it for manufacturing or transportation

Why do exchange rates cause supply side shocks?

A rise in these will reduce prices of imported raw materials, producing a positive shock

Why do government indirect taxes cause supply side shocks?

A rise in these would mean firms making less profit when they sell products as they need to pay the government more leading to a decrease in supply

If labour costs increase what will happen to the costs of production?

Increase

If raw material and energy prices increase what will happen to the costs of production?

increase

If exchange rates increase what will happen to the costs of production?

Decrease

If government indirect taxes increase what will happen to the costs of production?

Increase

What does AS stand for?

Aggregate supply

What are the 2 types of AS?

LRAS and SRAS

What is the definition of SRAS?

The level of output firms in the economy are willing to supply at a given price level

What is the definition of LRAS?

The maximum possible level of supply in the economy, where all resources are fully employed

When does LRAS shift?

When there is a change in the quantity or quality of resources such as land, labour or capital

What does LRAS show?

The limit to production