Short & Long-Run 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.

1Microeconomics

1.1Competitive Markets: Demand & Suply

1.1.1Markets & Demand

1.1.2Diminishing Marginal Returns

1.1.3Supply

1.1.4Market Equilibrium

1.1.5Price Mechanism

1.1.6Consumer & Producer Surplus

1.1.7IB Multiple Choice - Demand

1.1.8IB Multiple Choice - Supply

1.2Elasticity

1.2.1Elasticities of Demand

1.2.2Factors Affecting Price Elasticity of Demand

1.2.3Elasticity of Supply

1.2.4Price Elasticity of Supply

1.2.5IB Multiple Choice - Price Elasticity of Demand

1.2.6IB Multiple Choice - Price Elasticity of Supply

1.2.7IB Multiple Choice - Other Elasticities

1.3Government Intervention

1.3.1Indirect Taxes & Subsidies

1.3.2Application Question - Taxing Prices or Quantities

1.3.3Subsidies & Price Controls

1.3.4Deadweight Loss & Government Intervention

1.3.5Elasticity & Tax Incidence

1.3.6IB Multiple Choice - Government Intervention

1.4Market Failure

1.4.1Types of Market Failure

1.4.2Introduction to Externalities

1.4.3Negative Externalities

1.4.4Policy for Negative Externalities

1.4.5Positive Externalities

1.4.6The Deadweight Welfare Loss of Externalities

1.4.7Case Study - The Externalities of Education

1.4.8Public Goods & the Free-Rider Problem

1.4.9Asymmetric Information

1.4.10End of Topic Test - Market Failure

1.4.11Application Questions - Market Failure

1.5HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2Macroeconomics

2.1The Level of Overall Economic Activity

2.1.1The Circular Flow of Income

2.1.2Defining GDP

2.1.3Limitations of GDP

2.1.4IB Multiple Choice - Economic Indicators

2.1.5Business Cycles

2.1.6Output Gaps

2.2Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve

2.2.2Components of Aggregate Demand

2.2.3Shape of the Aggregate Demand Curve

2.2.4Shifts in Aggregate Demand

2.2.5IB Multiple Choice - Aggregate Demand

2.2.6Short & Long-Run Aggregate Supply

2.2.7Alternative Models of LRAS

2.2.8Equilibrium in the AD-AS Model

2.2.9Output Gaps & the AD-AS Model

2.3Macroeconomic Objectives

2.3.1Introduction to Unemployment

2.3.2Limitations of Unemployment

2.3.3Types of Unemployment

2.3.4Causes & Impact of Unemployment

2.3.5Defining Inflation

2.3.6Measuring Inflation

2.3.7Use of Index Numbers

2.3.8The Consumer Price Index

2.3.9Consequences of Inflation

2.3.10Causes of Inflation

2.3.11Inflation & Unemployment Tradeoff

2.3.12The Short-Run Phillips Curve

2.3.13The Long-Run Phillips Curve

2.4Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth

2.4.2Determinants of Productivity

2.4.3Economic Growth & Productivity

2.4.4Absolute & Relative Poverty

2.4.5Inequality

2.4.6Inequality 2

2.4.7Lorenz Curve

2.4.8Government Policy on Poverty

2.4.9End of Topic Test - Poverty & Inequality

2.4.10Application - Inequality & Poverty

2.5Fiscal Policy

2.5.1Introduction to Fiscal Policy

2.5.2Fiscal Policy and AD-AS Model

2.5.3Fiscal Policy Lags

2.5.4Automatic Stabilizers

2.5.5IB Multiple Choice - Fiscal Policy

2.6Monetary Policy

2.6.1Objectives of Monetary Policy

2.6.2Monetary Policy Implementation

2.6.3Monetary Policy & AD-AS Model

2.6.4Monetary Policy Lags & Pitfalls

2.7Supply-Side Policies

2.7.1Supply-Side Policies

2.7.2Supply-Side Policies 2

3The Global Economy

3.1International Trade

3.1.1Globalisation

3.1.2Globalisation for LEDCs

3.1.3Globalisation for MEDCs

3.1.4Comparative Advantage & Trade

3.1.5Protectionism

3.1.6Arguments for Protectionism

3.1.7Arguments Against Protectionism

3.1.8End of Topic Test - Globalisation & Trade

3.1.9Case Study - Globalisation & Trade

3.2Exchange Rates

3.2.1Floating Exchange Rates

3.2.2Fixed Exchange Rate

3.2.3Effect of a Stronger & Weaker Dollar

3.3The Balance of Payments

3.3.1Balance of Payments

3.3.2Balance of Payments 2

3.3.3FDI & Reducing a BoP Deficit

3.4Economic Integration

3.4.1Customs Unions & WTO

3.4.2Merged Currency

3.5Terms of Trade

3.5.1Absolute & Comparative Advantage

3.5.2Gains from Trade

3.5.3Terms of Trade

3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6Economic Development

3.6.1Factors Influencing Growth & Development

3.6.2International Institutions

3.6.3Measures of Development

3.6.4Barriers to Development

3.6.5Case Study - The Bottom Billion

3.6.6End of Topic Test - Emerging & Developing

3.7The Role of Domestic & International Factors

3.7.1Interventionist Strategies

3.7.2Development Strategies

3.7.3Development Promotion Policies

3.7.4End of Topic Test - Growth & Global Development

3.7.5Application Questions -Growth & Global Development

3.8The Role of International Trade

3.8.1International Institutions

3.8.2End of Topic Test - Globalisation & Trade

3.9The Role of Foreign Aid

3.9.1Aid

3.9.2Limitations of Aid

3.9.3Support for Aid

3.9.4Application Questions - Developing Countries

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