Chapter 27: Aggregate Supply

1. Define 'aggregate supply curve'. 

The relationship between the average price level of an economy and the level of total output . It shows how much output a firm wishes to supply at each level of prices. 

1. How do firms tend to increase output in the short run? 

When there is a greater demand, quantity supplied must increase to keep equilibrium. Firms cannot take on more staff as that is costly and cannot be done in the short run. So they increase the intensity of labour on the current workforce (e.g. overtime) 

1. Why is the short-run aggregate supply curve relatively price elastic? 

Prices of factors of production are constant and increase in costs would be fairly small. So the increase in the price of output would be small. 

1. What factors cause a shift in the SRAS? 

• Wage rates 

• Raw material prices 

• Taxation 

• Exchange rates 

• Productivity 

1. Explain 3 factors that affect SRAS. 

• A fall in prices of raw materials will lower costs of production and would lead to firms lowering their prices of their products. Therefore there will be a shift outwards of the supply curve. A change in raw materials can happen when demand for commodities fall or when the value of pound rises, therefore exports are lower in price. 

• A fall in exchange rates would make the price of imports more expensive. This would lead to an increase in prices throughout the economy. The SRAS would shift inwards/upwards. 

• Productivity would change when there is a change in the factors of production. In the SRAS, an increase in productivity will reduce costs of…