Aggregate Supply

Aggregate supply is the total quantity of output supplied in an economy, at a given price level and time period.

SRAS

In the short-run, firms may have little flexibility when it comes to changing their inputs. If they need to change output in the short run they may need to increase the amount they use their resources, such as paying workers overtime.

Impact of the £ decreasing in value against the $

If the £ loses value in comparison to the dollar, then oil will increase in price. Oil is an essential commodity, so this will lead to SRAS shifting left.

SRAS shifting left

The result of this is the economy shrinking and inflation in the SR.

Factors that can shift SRAS

  • Changes in unit labour costs
    • Firms agreeing to paying higher wages
    • Falling worker productivity
  • Commodity prices
    • Changes in raw material costs
    • Could be affected by exchange rate
  • Government taxation and subsidy
    • Changes to producer taxes and subsidies levied by the government, such as a rise in VAT will cause higher costs and an inward shift

Classical LRAS

In the long run LRAS will increase due to increases in the quantity or quality of the four factors of production. This shows the classical LRAS, see also the Keynesian LRAS.

Factors that cause shifts in LRAS

  • Expanding the labour supply
    • Improving incentives for people to search for and accept new jobs
  • Increase the productivity of labour and capital
    • Investing in training and edcuation of the labour force
    • Improvements in technology / capital
  • Investment in infrastructure
  • Explore / discover new sources of raw materials.

Example LRAS diagram

  • LRAS curve is perfectly inelastic
  • Economic output stays the same regardless of price level (in LR)
  • Economic output / unemployment only changes in the LR due to shifts in LRAS
    • AD has no impact in LR
  • The LRAS shifts right due to increases in the quality or quantity of the 4 factors of production.