Aggregate supply

The characteristic of aggregate supply

Volume of goods and services produced in an economy within a given period of time

(If business want to increase production they have to increase the amount of hours their workers do)

• Firms may decide to take on temporary workers

• Average and marginal cost of labour per good produced will rise

• Short run AS is likely to be elastic (Output is relatively responsive to change in price )

Short run AS

Factors influencing short run AS

• changes in cost of raw material and energy

• Changes in exchange rate

• Changes in tax rates

Long run AS curve

Classical

• Independent on price level

• Determined by the level of all FOP and quality of technology

• In short run it is possible to exceed maximum potential of LRAS, by allowing factors of production to work over time

• Markets tend to correct themselves fairly quickly

Keynesian

• At high unemployment LRAS is elastic

• Between point A and B employment rises, so less people are looking for jobs and labour is becoming scarce so employees have to offer higher wages

• After point B an increase in price no longer affects output

Factors influencing long run AS

• technological advance

• Changes in relative productivity

• Changes in education and skill

• Changes in government regulation

• Demographic changes and migration

• Competition policy