Transcript Aggregate supply

MACRO – Aggregate Supply (AS)
key macroeconomic concept
Aggregate Supply
• The total output of goods and services that
producers in an economy are willing and able to
supply at a given price level, in a given period of
time.
The Short Run Aggregate Supply Curve (SRAS)
Price
Level
SRAS1
SRAS curve indicates the total
output domestic producers are
willing and able to supply in a time
period when the prices of factor
inputs, including labour and raw
materials, remain unchanged.
Wages in particular are often inflexible due
to contracts, minimum wage legislation and
trade union involvement
Pl2
At higher price levels, firms can cover any
extra wage costs (such as overtime for
workers) and can increase output. Also
firms are willing to supply more at higher
price levels as profit margins are likely to
rise with higher prices.
Pl1
Y1
Y2
Real
GDP
Shifts in the SRAS curve
Price
Level
SRAS1 SRAS2
A change in any factor affects
the costs of production, will
cause a shift of the AS curve.
A shift in the curve indicates AS
has changed at each and every price
level
What might cause a change in the
costs of production (for a lot of
firms in the economy)
PL1
Y1
Y2
Real GDP
It is important to be
able to explain why this
would occur, through
the effect on the costs
of production.
Increases in AS
Price
Level
SRAS1 SRAS2
Possible causes of an increase
in aggregate supply, shown by a
shift in the AS curve to the
right (ASAS1)
Includes:
• A reduction in real wage rates eg. Due
to a change in the minimum wage
• A fall in raw material costs eg. Oil
prices
• Change in corporation tax
• Increased factor productivity
• Lower costs of finance
•Supply side shocks, i.e. – a significant
increase in energy costs as a result of
conflict in oil/gas producing regions.
•Reductions in costs associated with
bureaucracy (red tape).
PL1
Y1
Y2
Real GDP
Using AS and AD analysis (using short run aggregate supply - SRAS)
SRAS1
Price
Level
PL1
AD1
Y1
Real
GDP
Using AS and AD analysis (using short run aggregate supply - SRAS)
Price
Level
A rise in AD, shown
by a shift of the
AD curve from AD1
to AD2, results in
an increase in real
output from Y1 to
Y2 and an increase
in the average
price level from
PL1 to PL2
SRAS
PL2
PL1
AD1
Y1
Y2
Real
GDP
AD2
Using AS and AD analysis (using short run aggregate supply - SRAS)
Price
Level
A fall in AD,
shown by a shift
of the AD curve
from AD to AD1,
results in an fall
in real output
from Y to Y1 and
a fall in the
average price
level from PL1 to
PL2 indicating a
fall in the rate of
inflation
SRAS1
PL1
PL2
AD1
AD2
Y2
Y1
Real
GDP
Task
1. Explain one factor that might cause a fall
in SRAS.
• Illustrate and explain what impact this is
likely to have on an economy in the shortrun
2. Explain one factor that might cause a
rise in SRAS.
• Illustrate and explain what impact this is
likely to have on an economy in the shortrun
Next…Long- run equilibrium