2.3 Aggregate Supply

Aggregate supply

The total value of goods and services that producers plan to sell in an economy, at a given price level, over a given period of time

Movement in the aggregate supply curve

A movement in the aggregate supply curve occurs when there is a change in the price level of an economy

An increase in the price level = an extension in aggregate supply

A decrease in the price level = a contraction in aggregate supply

Shift in the aggregate supply curve

A shift in the aggregate supply curve is caused by non-price level factors

Wages/cost of labour

Indirect taxes

Oil/gas/energy prices

Raw material prices

Factors causing a shift in short-run aggregate supply - wages/cost of labour

Factors causing a shift in short-run aggregate supply - indirect taxes

Factors causing a shift in short-run aggregate supply - oil/gas/energy prices

Factors causing a shift in short-run aggregate supply - raw material prices

Long-run aggregate supply

The value of all goods/services produced within an economy, assuming all factors of production are fully and efficiently employed

Analogous to the PPF; it demonstrates what the economy could produce at a maximum, not necessarily what it actually produces

Classical model of LRAS

Classical model believes that in the long-run the economy will achieve full employment, as markets are fully efficient, and economic agents in the markets are fully rational

Supports ‘bissez faire’ policy; leave the market/economy alone

Keynesian model of LRAS

Keynesian model believes the economy will not always achieve full employment, as markets can be inefficient, and economic agents in the markets can be irrational, resulting in spare capacity

Therefore, government intervention is needed to reach full employment

Shift in the long-run aggregate supply curve

Quality of factors of production

Quantity of factors of production

Factors causing a shift in long-run aggregate supply - quality of factors of production

Efficiency/productivity of the factors of production within an economy

Factors causing a shift in long-run aggregate supply - quantity of factors of production

Volume of factors of production in the economy