Aggregate SupplyThe Sum of all planned domestic production at a given general price level per period
SRAS/LRAS?• There are two types of Aggregate Supply• Short Run Aggregate Supply• Long Run Aggregate Supply
Short Run Aggregate Supply• This assumes that prices of all factors are fixed• As you supply more, more must be paid
Shifts in the Curve• Like AD the SRAS curve can shift.• If there is a shift to the left it can mean costs of production may have risen (Cost Push Inflation)• Should there be a shift to the right, costs of production may fallen.• It is easier to look at a question of SRAS and see if what has happened will affect the cost of production.
Long Run Aggregate Supply• In the long run wage rates and input prices will change.• You need to know the two main view on LRAS – Neo-Classical View – Keynesian View
Neo-Classical View LRAS• This states that LRAS is a vertical line.• These economists argue that there is a tendency to full employment as wages will fall until full employment is restored.• This means that they believe the economy in the long run will operate at full employment
Keynesian LRAS Curve• The curve is different• They believe that in the Long Run unemployment will always exist as wages are sticky downwards• This means that should AD fall, workers will resist cuts in pay and the economy will not return to full employment as the classical economists say
Keynesian LRAS Curve• Keynesians say that at low levels of output there is low levels of employment, the curve will be horizontal• This is due to spare capacity in the economy• This means output can be increased without a cost rise• Once pressure is placed on the capacity and inputs become in short supply such as skilled workers , the curve slopes up• Once you reach full employment you cannot raise output anymore so the curve is vertical
Shifts in the Curve• Changes to LRAS are changes to the productive potential of the economy• Increase, shift right – Quality of Inputs are increased e.g. Education in the Labour Market – Quantity of Inputs are increased e.g. size of labour force• Decrease, shift left
Case Study• After the Second World War, many of Britain’s soldiers were dead, which meant that the productive capacity of the economy was damaged due to a reduction in the labour force
Case Study• However in 1964 the Baby Boom was fully realised on the size of the labour force
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