2.3 aggregate supply

aggregate supply

the total level of output

SRAS curve

in short run theres a positive correlation between price and output

shifts in AS curve

• technological advances

• relative productivity

• changes in education/skills

• changes in government regulation

other factors that affect SRAS

• wage rates

• indirect taxes

• exchange rate

• worker productivity

LRAS

long run aggregate supply curve

in long run as more resources are used to increase output

AS becomes more inelastic i.e increase in price may not increase AS due to no spare capacity

2 types of LRAS

• Keynesian AS curve

• Classical AS curve

Keynesian AS curve

at low-levels of output,Real GDP can be increased without significant pressure on price to rise - plenty of spare capacity

however as demand increases and we approach full capacity AS becomes more vertical i.e inelastic i.e run out of resources

classical AS curve

here the classical approach assumes that in the long run output will always be at full capacity level

its best to shift AS because it will increase output while decreasing price

why is infrastructure spending important for LRAS

• reduces inflation

• boosts economic growth

• increases output

• increase transport

• increase AD. AS

examples of Govt regulation which affect LRAS

1. increase Investment into infrastructure

2. changes in direct taxes levels

3. changes to business rates

however wether a business decides to invest or not is down to them

demographic changes and migration affect on LRAS

• increase immigration - increase labour supply

• increase life expectancy - increase pension age

• increase population