Characteristics of Aggregate Supply (1)

What is aggregate supply ?

• Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time

A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy - Why is the SRAS curve upward sloping ?

• The SRAS curve is upward sloping due to two reasons

  • The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward sloping

  • As real output increases, firms have to spend more to increase production e.g. wage bills will increase

    • Increased costs result in higher average prices

When is there a movement along the short run aggregate supply (SRAS) curve ?

• Whenever there is a change in the average price level (AP) in an economy, there is a movement along the short run aggregate supply (SRAS) curve

A diagram showing an increase and decrease in the average price level (AP) which causes a movement along the short run aggregate supply (SRAS) curve leading to a contraction/expansion (extension) of SRAS - Diagram Analysis

• An increase in the AP (ceteris paribus) from AP₁ → AP₂ leads to a movement along the SRAS curve from A → B

  • There is an expansion (extension) of real GDP from Y₁ → Y₂

• A decrease in the AP (ceteris paribus) from AP₁ → AP₃ leads to a movement along the SRAS curve from A → C

  • There is a contraction of real GDP (output) from Y₁→Y₃

When is there a shift of the entire SRAS curve ?

• Whenever there is a change in the conditions of supply in an economy (e.g. costs of production), there is a shift of the entire SRAS curve

A diagram showing a shift in the entire short run aggregate supply (SRAS) curve due to a change in one of the conditions of supply in an economy - Diagram Analysis

• A decrease in labour costs results in a shift right of the entire curve from SRAS₁ → SRAS₂

  • At every price level, output and real GDP have increased from Y₁ → Y₂

• An increase in labour costs results in a shift left of the entire curve from SRAS₁ → SRAS₃

  • At every price level, output and real GDP have decreased from Y₁ → Y₃

What is Short run aggregate supply (SRAS) influenced by ?

• Short run aggregate supply (SRAS) is influenced by changes in the costs of production

  • Short run refers to the time period where at least one factor of production is fixed

What is long run aggregate supply (LRAS) influenced by ?

• Long run aggregate supply (LRAS) is influenced by a change in the productive capacity of the economy

  • Productive capacity is changed by changes to the quantity or quality of the factors of production

    • When production capacity changes, it is equivalent to a shift inwards/outwards of the production possibilities frontier (PPF)
      

What does long term economic growth require ?

• Long term economic growth requires the productive capacity to increase