Aggregate Supply, Diminishing marginal returns, SRAS and LRAS,

Aggregate supply

Measures the volume of goods and services produced in an economy each year

aggregate supply curve

Shows the amount of goods that can be produced at different price levels in an economy

Short-run and long-run

We divide aggregate supply into:

all firms to maximise profits, cost of producing extra units of output increases as firms produce more output

The SRAS curve is upward sloping because of two assumptions of producers in the economy:

Short Run

In macroeconomics, this is any amount of time in which one factor of production is fixed, that is it can’t be changed

fairly elastic

What can be assumed about the PED of the SRAS curve?

Diminishing marginal returns

If the variable factors of production is increased, e.g. labour, there comes a point where adding an additional factor of production results in smaller increase in output

marginal cost

the cost of the additional unit of output

additional cost / total units of output

How is marginal cost calculated?

Long run

• Reflects the productive potential of the economy

• Factors of production variable but still finite

• Economy assumed to be used optimally

• maximum sustainable output

changes in unit labour costs, changes in production costs, commodity prices, exchange rates, government tax and subsidies, price of imports

What factors shift the AS curve?

business cost and productivity

Shifting the AS curve depends on whether it is SR or LR but ultimately comes down to ….

costs of factors of production

Shifts in the SRAS curve depends on changes in ….

quantity or quality of factors of production

Shifts in the LRAS curve depends on changes in ….

Keynesian AS curve

• Initially increasing output does not increase price level(inflation)

• Increased output reduces output as more people are needed to fulfil product demand

• After a while we start to see diminishing marginal returns, cost of production rises and therefore prices start to rise

no more capacity in the economy and prices rise quickly as the productive capacity cannot meet demand in the economy

In the Keynesian AS curve, during the peak of a boom as we reach full employment, there is