Aggregate Supply

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Short Run Aggregate Supply Curve

AS is the total quantity of output firms will produce and sell at a given price level.

Short run aggregate supply

The SRAS curve is upward sloping.
The SRAS curve shows the total quantity firms will produce at each price level.
The curve shows how suppliers will react to a higher price level for final outputs of goods and services, holding inputs constant.
This is represented by the increasingly upwards sloping curve.

Movement along the SRAS

Movement along the SRAS curve is caused by a change in the average price level.

Shifts in the SRAS curve

Shifts in the SRAS curve can be caused by several factors:
- Business costs: labour and raw material costs may rise.
- Exchange rates: the exchange rate may lead to higher prices of imports.
- The government can impose taxes which can increase the cost of producing goods or services.

Supply side shock

A supply-side shock is anything (positive or negative) that causes SRAS to change.
Examples could be a bad harvest, technological improvement, or a new mineral discovery.
A rise in global oil prices will cause the SRAS to shift left as imported costs of production rise.
This will lead to the equilibrium level of real GDP falling, and the General Price Level to rise - that is, cost-push inflation, potentially causing the purchasing power of consumers to fall if wages have not caught up.

Difference between short run and long run

In the short run, at least one of the 'factors of production' (labour, land, enterprise or capital) are fixed.
In the long run, all factors of production are variable.
In the long run, the economy is operating at full employment (this is known as the natural rate of unemployment).

Long-Run Aggregate Supply

Underlying economic growth is shown by a rightward shift in the long-run aggregate supply curve (LRAS). This represents an increase in the productive capacity of the economy.

Long-run factors

The most important factor to shift LRAS outwards (to the right) is productivity growth. But it could also be an increase in the amount of factors of production (e.g. population growth).
Productivity could mean output per unit of labour (per worker).

Other long-run factors

Technology - e.g. faster broadband.
Infrastructure - e.g. better trains and roads and ports would mean goods and services can be produced and transported more efficiently.
Enterprise.
Cultural attitudes - e.g. if in some countries women were permitted to participate in the labour market, this would shift LRAS to the right.

Other long-run factors cont.

Factor mobility - e.g. the more occupational and geographical mobility there is in an economy, the more the LRAS will shift out.
Economic incentives - e.g. if corporation tax is lowered to attract foreign firms or domestic firms invest more, then the LRAS will shift out.

Using AS/AD to show equilibrium

The intersection between the AD and AS curves shows the equilibrium price level and real GDP of the economy.
At a low price level, firms have little incentive to produce, but consumers are willing to buy.
As the price level rises (also known as inflation), AS rises and AD falls until equilibrium is reached.

Different Models of LRAS

There are two models for the LRAS curve. The Keynesian Long-Run Aggregate Supply curve curves upwards. The Classical LRAS is vertical.

Classical LRAS

The Classical LRAS curve is vertical.
In the long run, when all of an economy's factors of production are being used, the economy is operating on its PPF and is at full capacity. An increase in price, cannot incentivise an increase in output, because output in the economy is maxed out.
The Classical LRAS can be shifted by an increase in the amount or quality of each factor of production.

Classical LRAS

Keynesian LRAS

Keynesian economists build models that have an LRAS that curves upwards.
At low quantities of output, there is a lot of spare capacity. Increases in output use up this spare capacity and they are not inflationary. Unemployed workers are hired and unused factors of production are used.
As output rises, supply starts to become a 'limiting factor'. There could be labour shortages, capital shortages or a shortage of raw materials. This is inflationary, but not impossible to increase output.
Eventually, the economy is at Y_full and all factors of production are being used. The economy is at full output.

Keynesian LRAS

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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