3.2.2.5 DETERMINANTS OF SHORT-RUN AGGREAGTE SUPPLY

If AD increases, is there a contraction or expansion of SRAS?

Expansion

If the AD decrease, is there a contraction or expansion of SRAS?

Contraction

If the economy has lots of spare capacity, is this elastic or inelastic?

Elastic

If the economy is near full capacity, is this elastic or inelastic?

Inelastic

An increase in AD affects real national income and the price level in what way?

• AD increases

• Real national income (Real GDP) increases (firms produce more)

• price level increase as production costs increase

What does a non-linear SRAS curve mean?

The curve gets steeper as output increases

Where the curve is flat, is this elastic or inelastic?

Elastic

Where the curve is steep, is this elastic or inelastic?

Inelastic

What happens where the curve is flat?

Flat - low levels of output - spare capacity - increase production without racine prices much - AD increases

What happens where the curve is steep?

Steep - at full/near capacity - AD increases - very large increase in price level - demand pull inflation (with only a small increase in output)

What does an outward shift represent?

Firms can produce more goods and services at every price level

SRAS shifts when production becomes cheaper

What 6 things cause an outwards shift in the SRAS curve?

• decrease in costs of production, including the costs of imported raw materials and energy

• a fall in unit labour costs, resulting in a decrease in wage costs

• an increase in labour productivity

• a reduction in indirect taxes such as VAT

• an increase in subsidies granted to firms by the government

• technical progress which improves the quality and productivity of capital goods

4 economic effects of a fall in AS?

• brain drain - an outwards migration of workers

• collapse in business capital investment saving

• higher production costs

• effect of a major natural disaster/shock

4 possible macro consequences of a fall in AS?

• may cause higher inflation

• may reduce real GDP/national output

• may reduce total employment

• may increase a BoP current account deficit

What are the 2 types of pricing?

• malign

• benign

If the change is price is not a bad thing, which one is this?

Benign

If the change in price is bad/has bad effects, which one is this?

Malign

What is malign pricing caused by?

Not enough AD in the economy

Examples of commodities?

• plastic,wood,oil,wood

What does an increase in commodity prices cause?

• increases provision costs

• decreases supply

• SRAS shifts outwards

If the question says 'explain possible causes of an inwards shift in the short run aggregate supply', what are some examples?

• costs of production increasing (specifically 2022 - Russia and Ukraine War)

• labour shortages (COVID pandemic)

• natural disasters - damaging resources (machinery, infrastructure)

• an economic shock - a war (number of workers and resources decrease)