2.3 Aggregate Supply

short run

time period where at least one factor of production is fixed

what causes a movement along SRAS

change in the price level

what causes a shift in SRAS

change in conditions of supply:

-changes in cost of raw materials and energy

-changes in exchange rates

-changes in tax rates

acronym for exchange rates effect

SPICEE

strong pound imports cheap exports expensive

long run

productive capacity has the ability to increase

what is productive capacity influenced by

changes in quantity or quality of factors of production

Keynesian LRAS

at Yf all factors of production are employed

supply is elastic at lower levels of output as there is high spare production capacity

supply is inelastic at full output as there is no spare production capacity

Classical LRAS

LRAS is perfectly inelastic at full employment

in the long run an economy will always return to full employment

Classical LRAS exogenous shock

a to b: exogenous shock

b to c: recovery due to reducing wages, high unemployment gives firms wage bargaining power, wages fall lowering prices, demand increases ( movement along) real GDP recovers

what is the output gap

the gap between Yf and Y, the difference in factors employed and total avaliable factors

causes of Keynesian AS shift

-change in price of FoPs

-change in quantity or quality of FoPs

shift in LRAS due to change in price of FoPs

the maximum the economy can produce does not change

the gap between Yf and the actual Y shows unemployment

so unemployment is greater at AS2 than AS1

shift in LRAS due to change in quality or quantity of FoPs

The potential the economy can produce increases

output gap may or may not change

price level decreases

factors influencing LRAS

-technological advances

-changes in productivity

-changes in education and skills

-changes in government regulation

-net migration

-competition policy