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Aggregate supply (Short-run aggregate supply (The graph (Looks very much…

- - - - For a change to have an effect on aggregate supply we are assuming an increase in the price of significant, widely used raw materials.
    - - If the capital or raw materials used by a country's industries are imported, then a rise in import prices will increase the costs of production. This can occur due to changes in the exchange rate of a country's currency.
    - - An increase in wages will result in an increase in the costs of production to firms and therefore a fall in aggregate supply.
    - - An increase in indirect taxes effectively increases the costs of production to firms and therefore results in a fall in the SRAS curve. Conversely, a fall in indirect taxes will result in an increase in the SRAS curve. Since subsidies are a payment from governments to firms, then an increase in government subsidies reduces firms' costs of production, resulting in a decrease in the SRAS while a decrease in subsidies will increase firms' costs of production and shift the SRAS curve to the left.
- - - - It is important to stay up-to-date with modern developments, to develop new production techniques, and to constantly seek improved methods of production. All of these may increase the economy's potential output, but all involve extensive spending on research and development.
        The GOVERNMENT can encourage research and development by firms by offering tax incentives. E.g., they can allow firms not to pay taxes on the retained profits used for R&D (tax credit). Firms may be reluctant to spend on R&D in case they won't be able to reap the full benefits of their spending. Governments can thus encourage R&D by guaranteeing intellectual property rights such as patents and copyrights.
        Alternatively, governments themselves could finance R&D in public research facilities and universities.
    - - Infrastructure is the large scale capital, usually provided by the government, which is necessary for economic activity to take place (roads, electricity, water supply, sanitation, waste management, railways, airports, ports, telecommunications, internet access, and public transportation). Since these are all necessary for economic activity to take place, the productive potential of an economy will be enhanced by improved infrastructure.
    - - Education, training needs to be available to increase the quality/productivity of the labor force. It is the responsibility of the government to ensure that the country's educational facilities are geared to providing the necessary skills and knowledge for a dynamic economy.
        The government can: support schools, universities, public training institutions, can also support firms which provide training and apprenticeship programmes.
    - - Governments have agencies or ministries who are responsible for developing policies that support and encourage the development of industry. Their mandates: improving the competitive nature of industries through the maintenance of anti-monopoly laws, helping small and medium enterprises to become established and to grow, supporting export companies in their access to markets abroad, and advising government on the ways in which education can meet the needs of businesses.
  - - - Reduction or elimination of minimum wages
        
        Because a government-set minimum wage will keep the price of labour above its free market level, a reduction or abolition of the minimum wage would decrease the cost of labour and thus increase aggregate supply.
      - Reduction in trade union power
        
        The responsibilities of trade unions: protecting workers' well-being, rights, and incomes. It may be perceived that trade unions raise costs of workers above the level that would be the case in a non-union environment. The argument is that reducing (extreme, eliminating) trade union power will reduce the ability of unions to negotiate higher costs of labour >> lower the costs of production to firms and increase the number of workers that firms may hire.
      - Reduction in unemployment benefits
        
        Unemployed people are given generous benefits from the government>> they will have less incentive to find and take jobs that are available. It is recommended that unemployment benefits be reduced to encourage unemployed people to take available jobs in the economy.
    - - Governments have placed many regulations on the operations of businesses >> this may increase their costs of production, reducing potential output in the economy ( environmental laws, health and safety regulations, or laws concerning working hours, leave and holidays. A reduction in the number and/or the severity of regulations, i.e. deregulation, will help to increase aggregate supply.
    - - Businesses are able to keep more of their profits >> they will have more money available for investment ( the addition of capital stock to the economy)/ Greater investment >> more capital>> an increase in a factor of production. More profites>> more research and development>> advances in technology. The businesses know that they are going to be able to keep a larger share of their profits, rather than give it to the government in taxes>> they will have more incentive to produce efficiently.
    - - This is the sale of public government-owned firms (nationalized firms) to the private sector. Privately-owned, profit-maximizing firms will be much more efficient than nationalized firms and will therefore increase the potential output of the economy.
    - - Work harder >> earn more money >> pay higher taxes on the higher levels of income >> disincentive to work, as people prefer to substitute more work for more leisure time than pay higher taxes on the extra income.
        Reduced Income taxes >> they might have the incentive to work harder and to become more productive, thus increasing the potential output of the economy.
    - - Competition has the effect of encouraging greater efficiency. Any policies that increase competition( enforcing strict anti-monopoly laws) will increase efficiency and improve the productive potential of an economy. Policies that make a country more open to international trade ( trade liberalization) are likely to improve the efficiency of domestic firms.