aggregate supply✅

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15 Terms

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Aggregate supply

The quantity of goods and services that producers in an economy are willing and able to supply at a given level of price

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SRAS

Short run aggregate supply is the total quantity of goods and services an economy can produce at a given pice level, with some factors of production fixed

<p>Short run aggregate supply is the total quantity of goods and services an economy can produce at a given pice level, with some factors of production fixed</p>
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What causes a shift in aggregate supply

  • Cost of production

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External factors and aggregate supply

  1. Commodity prices

  2. Volatile exchange rates

  3. Level of net migration

  4. Import tariffs

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LRAS

Long run aggregate supply is the total amount of goods and services and economy can produce in the long run assuming all factors of production are flexible

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2 types of LRAS

  1. Keynesian LRAS (Keynes)

  2. Classical LRAS (Hayek)

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Classical LRAS

A vertical curve at full employment levels, classical economists believe in the long run the economy will always self correct to full capacity

<p>A vertical curve at full employment levels, classical economists believe in the long run the economy will always self correct to full capacity </p>
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Keynesian LRAS

  • The LRAS curve has 3 sections

  • An economy can remain below full employment due to price and wage rigidities

  • Government intervention is needed to stimulate demand and move towards full capacity

<ul><li><p>The LRAS curve has 3 sections</p></li><li><p>An economy can remain below full employment due to price and wage rigidities</p></li><li><p>Government intervention is needed to stimulate demand and move towards full capacity </p></li></ul><p></p>
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Shifts in LRAS

Shifts in LRAS occur because the quantity and/or quality of factors of production have changed

  • Capital

  • Land

  • Labour

  • Enterprise

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Shifts in LRAS - Capital

  • Improvement in technology = better machines

  • Division of labour (specialisation) = higher productivity

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Shifts in LRAS - Enterprise

  • More competition = more efficiency

  • Lower taxes and less regulations = more innovation

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Shifts in LRAS - Land

  • Improving mining techniques = more raw materials extracted

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Shifts in LRAS - Labour

  • More migrants/higher birth rates/higher participation rates/high retirement ages = more workers

  • Improved health = less absenteeism

  • Better education and training = improved skills

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Bottlenecks

  • Bottle necks occur when output is on the inelastic part of the LRAS curve with no easy way to remedy the problem

  • This can lead to higher price levels

  • A bottleneck is any factor that delays or restricts production, leading to shortages, higher prices, and slower economic activity

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Reasons for bottlenecks

  • Lack of raw materials

  • Lack of land

  • Lack of skilled labour

  • Insufficient capital