aggregate supply
DESCRIPTION
Overview of AS, both SRAS andTRANSCRIPT
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Aggregate Supply
The Sum of all planned domestic production at a
given general price level per period
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SRAS/LRAS?
• There are two types of Aggregate Supply• Short Run Aggregate Supply • Long Run Aggregate Supply
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Short Run Aggregate Supply
• This assumes that prices of all factors are fixed
• As you supply more, more must be paid
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Shifts in the Curve
• Like AD the SRAS curve can shift.• If there is a shift to the left it can mean
costs of production may have risen (Cost Push Inflation)
• Should there be a shift to the right, costs of production may fallen.
• It is easier to look at a question of SRAS and see if what has happened will affect the cost of production.
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Shifts in the Curve
Costs Up
Costs Down
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Long Run Aggregate Supply
• In the long run wage rates and input prices will change.
• You need to know the two main view on LRAS– Neo-Classical View– Keynesian View
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Neo-Classical View LRAS
• This states that LRAS is a vertical line. • These economists argue that there is a
tendency to full employment as wages will fall until full employment is restored.
• This means that they believe the economy in the long run will operate at full employment
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Neo-Classical View LRAS
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Keynesian LRAS Curve
• The curve is different• They believe that in the Long Run
unemployment will always exist as wages are sticky downwards
• This means that should AD fall, workers will resist cuts in pay and the economy will not return to full employment as the classical economists say
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Keynesian LRAS Curve • Keynesians say that at low levels of output
there is low levels of employment, the curve will be horizontal
• This is due to spare capacity in the economy• This means output can be increased without
a cost rise• Once pressure is placed on the capacity and
inputs become in short supply such as skilled workers , the curve slopes up
• Once you reach full employment you cannot raise output anymore so the curve is vertical
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Keynesian LRAS Curve
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Shifts in the Curve
• Changes to LRAS are changes to the productive potential of the economy
• Increase, shift right– Quality of Inputs are increased e.g. Education
in the Labour Market– Quantity of Inputs are increased e.g. size of
labour force
• Decrease, shift left
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Case Study
• After the Second World War, many of Britain’s soldiers were dead, which meant that the productive capacity of the economy was damaged due to a reduction in the labour force
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Case Study
• However in 1964 the Baby Boom was fully realised on the size of the labour force