Short run aggregate supply

What is the equation for profit?

Revenue (income from sales) - Costs of production

What two things can you do in order to increase profit?

Increasing revenue and decreasing costs of production

If the costs increase and the profit increases what does this mean?

Firms close meaning that supply decreases

What is the whole concept of SRAS?

Profit being affected by changes in costs of production leading to more/less supply

Approximately how many firms are there in the world?

5 million

When does the SRAS curve shift?

When a significant cost of production changes and affects many firms

What is an example of a significant cost of production?

Oil

What does a shift out in SRAS mean? (SRAS1 to SRAS2)

Firms want to supply more than before

What is a shift out in SRAS caused by and what does this mean?

A fall in costs of production which means more profits compared to before

What are the four main causes of supply side shocks?

• Labour costs

• Raw material

• Exchange rates

• Government indirect taxes

A rise in what factor will reduce prices of imported raw materials and what does this produce?

Exchange rates - producing a positive shock

A rise in what factor would mean firms make less profit when they sell their product and why?

Government indirect taxes because they need to pay the government more so supply will decrease

What is the most important form of raw material and why?

Oil because almost all firms need it for manufacturing or transportation

If labour costs increase what will the effect be on cost of production?

Increase

If labour costs increase what will the effect be on SRAS?

Shift in

If Raw material and energy prices increase what will the effect be on cost of production?

Increase

If raw material and energy prices increase what will the effect be on SRAS?

Shift in

If exchange rates increase what will the effect be on cost of production?

Decrease

If exchange rates increase what will the effect be on SRAS?

Shift out

If government indirect taxes increase what will the effect be on cost of production?

Increase

If government indirect taxes increase what will the effect be on SRAS?

Shift in

What are the two types of aggregate supply?

• Short run AS (SRAS)

• Long run AS (LRAS)

What is the definition of SRAS?

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

What makes SRAS shift?

When there is a change in the costs of production

What is the definition of LRAS?

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

What causes a shift in LRAS?

Change to the quantity/quality of resources