Aggregate Supply
- Created by: hattie.coley
- Created on: 15-05-17 14:50
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- Aggregate Supply
- Definition
- The total goods and services that producers in an economy are willing and able to supply at a given price levels in a given period of time
- Supply Curves
- LRAS assumed to be vertical. Closely linked to PPC.
- SRAS upward sloping as higher prices increase profit and expansion possibilities
- Shows planned output when P can change
- BUT Prices of all factor inputs are held constant
- Starts perfectly elastic
- Unemployment high
- Output low
- Lots of Spare Capacity
- More can be supplied w/o P level increasing
- Real GDP < Potential GDP
- Becomes more inelastic (more unresponsive to changes in P Level)
- Diminishing Return
- Less productive labour and machinery so cost of production increases
- Diminishing Return
- At Yfc, producers are producing at full capacity
- Shows planned output when P can change
- Shifts in SRAS
- Main causes = changes in P of F.O.P
- Change in P of raw materials affects firms costs
- Can be affected by worsened exchange rates
- Change in fiscal policy relation tax and subsidies also effects producers costs
- Increased tax = inward shift
- Change in P of raw materials affects firms costs
- Main causes = changes in P of F.O.P
- Long Run AS
- Supply Side Policies improve long term economic performance
- LRAS assumed to be separate from P level
- Determined by productivity of F.O.P
- AD>AS and economy cannot cope
- inflationary pressure if economy at full employment
- Anything that shifts AD or AS will shift macroeconomic equilibrium
- Circular Flow of Income
- Shows movement of spending and income throughout the economy
- Leakages
- Taxes
- Savings
- Spending on imports
- At Macroeconomic Equilibrium: leakages = injections so output isn't changing
- Injections
- Investment
- Gov Spending
- Exports
- At Macroeconomic Equilibrium: leakages = injections so output isn't changing
- The Multiplier Effect
- initial injection will have much greater effect on final AD rise
- Assumes spare capacity for extra output
- Elasticity of SRAS determines ME
- initial injection will have much greater effect on final AD rise
- Definition
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