Ch 15 - Aggregate Supply

full capacity

full capacity

When the economy is at ________, all factors are being used and so output can not increase.

Producers

________ in the economy can raise their own level of output without higher average costs.

SRAS curve

________ is upward sloping, higher the level of prices, more products will prepare to produce.

Aggregate supply

________: total amount of goods and services that all industries in the economy will produce at a given price level.

Short run aggregate supply

SRAS

Positive slope

AS has a positive slope because the price level and AS have a direct relationship. The price level increases real AS increases

Movement along the supply curve

an increase in price will cause an increase in the price level which leads to an increase in output in the short run, as an increase in prices will make it more profitable to produce.

Shift in the short run aggregate supply curve

when factors of production change.

A supply shock

is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price.

New classical view (free market view)

its position depends upon the quantity and productivity (quantity) of factors of production. National outputs may only be increased by adopting supply-side policies to shift the LRAS to the right

Spare capacity

the resources (land, labour, capital and enterprise) are not fully employed. It is possible to increase output without expecting an increase in costs and price level will remain constant.

Approaching full employment

as the economy approaches full employment shortages start to occur in the economy they have the effect of bringing up the price/cost of the resources

Full employment

all resources are being used fully and it is not possible to increase output. Any attempt to increase output will simply result in higher prices.

The Keynesian economists believe

that unemployment can exist in the long-run in an economy as the labour market does not always reach equilibrium resulting in unemployment.

Factors that cause a shift to the SRAS curve

• Supply shocks can only be shifted by:

• Rent wages

• Cost of raw material

• Price of imports

• Government policy