2.3. Aggregate Supply

What does the Aggregate Supply (AS) curve indicate?

It indicates the volume of goods and services produced within the economy at a given price level.

In the short run, how can a business increase production?

By increasing the hours of work their employees do, such as by offering overtime or hiring temporary workers.

Why might firms not want to employ additional full-time staff in the short run?

They might not want to commit to full-time staff due to the risk of needing to lay them off if sales fall.

What happens to the marginal and average cost of labor when production increases?

Both the average and marginal cost of labor per good produced will rise.

What is the shape of the short-run Aggregate Supply (SRAS) curve?

The SRAS curve is upward sloping.

What does it mean when short-run AS is elastic?

Output is relatively responsive to a change in price, changing by a larger percentage than price.

What does a movement along the AS curve represent?

A movement along the curve represents changes in price level leading to contraction or expansion of output.

What causes a shift in the Aggregate Supply curve?

A range of factors, such as changes in production costs, factor prices, and technology.

What occurs in the short run when factor prices are constant?

If demand falls, firms may cut prices, but the reduction will be limited due to fixed factors.

How does a change in the cost of raw materials affect SRAS?

An increase in the cost of raw materials shifts the SRAS curve to the left as businesses will produce less if prices do not rise.

What impact do changes in exchange rates have on SRAS?

A weaker pound leads to increased import prices, decreasing SRAS, while a stronger pound makes imports cheaper and increases SRAS.

What effect do changes in tax rates have on SRAS?

Higher taxes increase costs and shift the SRAS curve to the left, while subsidies lower costs and shift it to the right.

What are supply-side shocks?

Significant changes in production factors that can affect SRAS and shift the curve.

In the long run, what limits supply increase?

There is a limit on the number of available people and machines, and production cannot be increased indefinitely.

How do wage rates behave in the long run AS?

Wage rates are variable and can change.

What does classical economics say about the long-run AS curve?

It is independent of the price level and determined by the quantity of factors of production and technology quality.

What is the productive potential of the economy as indicated by the LRAS curve?

It measures the potential output of a country where all resources are fully utilized.

How can an economy temporarily exceed its maximum potential LRAS?

By allowing factors of production to work overtime or delaying maintenance of machinery.

Why is the LRAS curve considered vertical in classical theory?

Because markets tend to correct themselves quickly towards equilibrium where resources are fully employed.

What did Keynes argue about the LRAS curve?

He argued that the AS curve is not always vertical and can remain disequilibrium for extended periods.

What happens to the LRAS during high unemployment?

The LRAS is perfectly elastic, meaning firms don’t have to offer high wages to attract staff.

What factors can shift the long-run AS curve to the right?

Increased productivity, technological advances, a more skilled workforce, and demographic changes.

How do technological advances affect LRAS?

They shift the LRAS curve to the right by allowing more goods to be produced with the same resources.

What role does education and skills play in the economy's LRAS?

A more skilled workforce increases output per worker, shifting the LRAS curve to the right.

How does government regulation impact LRAS?

Regulations can increase workforce size and improve productivity, shifting the LRAS curve to the right.

What is the impact of immigration on LRAS?

Higher immigration increases the workforce, which can shift the LRAS curve to the right.

What is competition policy's effect on LRAS?

It promotes efficiency and output by forcing businesses to improve quality or lower prices.

What can government policies do to enhance research and development?

Offer tax breaks to businesses that invest in research and development, increasing LRAS.

What are supply-side shocks in relation to LRAS?

Events, such as wars or technological advancements, that lead to significant changes in production capacity.

What happens to prices when production costs decrease?

Lower production costs can lead to lower prices for consumers.

What is the effect of increased productivity on the LRAS curve?

It allows more goods to be produced with the same resources, shifting the LRAS to the right.

What does the PPF represent in relation to LRAS?

The PPF marks a country’s maximum potential output under current resources and technology.

How do government policies that encourage membership to the workforce affect LRAS?

These policies help increase the number of active workers, shifting the LRAS curve to the right.

What happens to the LRAS when competition increases?

Competition forces improvement in efficiency, thereby increasing the LRAS.

Why might some competition be beneficial according to LRAS theories?

Less competition can incentivize investment and innovation, resulting in increased LRAS.

What ensures that all resources are used efficiently in the economy?

Improving occupational mobility through education and skills training.

How does the minimum wage influence the labor market and LRAS?

It prevents wages from falling below a certain level, affecting labor availability and costs.

What types of resources influence the long-run Aggregate Supply (LRAS)?

Both the quantity and quality of factors of production, including labor, capital, and technology.

What does an outward shift of the PPF signify regarding LRAS?

It indicates the economy is capable of producing more goods and services.

How do changes in labor skills influence LRAS?

More skilled labor leads to faster, more efficient work, shifting LRAS to the right.

What is the relationship between import prices and SRAS?

As import prices rise due to currency weakening, SRAS decreases because production becomes more expensive.

How does the cost of energy impact SRAS?

Higher energy costs lead to a leftward shift in SRAS due to increased production costs.

What does it mean for wages to be 'sticky downwards'?

Wages do not easily decrease below a certain point, limiting how firms can reduce costs in downturns.