Unit 3.2(2): Variations in economic activity - aggregate supply(AS)- SRAS

Aggregate supply

total quantity of all goods and services the economy can produce at a given price level and in a given time period.

Short - run Aggregate supply

Short-run period when the price level in the economy can change but the cost of factors of production is held constant

→ positive relationship between the APL and short-run AS curve

→ APL rises firms increase output to take advantage of high profits

→ real output increases

Change in short-run aggregate supply

→ shift if business costs change due to a change in resource prices

→ if wage rates rise and raw materials rise it will shift left (vice versa)

→ changes in indirect taxation can also cause shifts in the short-run aggregate supply curve. If a country increases its rate of VAT from 20 per cent to 25 per cent, aggregate supply will fall, and the short-run aggregate supply curve will shift to the left.

Short-run equilibrium national income

country's real GDP determined by the interaction of short-run aggregate supply and aggregate demand.

AD = SRAS = real GDP

→ changes in short-run equilibrium wither change AD or AS will change the equilibrium level of national income

Change in AD due to a reduction in income tax on households

→ leads to rise in disposable income

→ increase in consumption and a rise in AD = APL rise also and an increase in Y

Change in Short-run aggregate supply fall and shift to the left due to

1. Rise in minimum wage in an economy = increased business costs = SRAS shifts left = R.GDP falls

→ equilibrium APL rises from P to P1 (increase)