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Aggregate Supply - Coggle Diagram
Aggregate Supply
Short-run aggregate supply
Curve is upward sloping, as the general price rises, producers are willing and able to supply more goods and services
Why is the curve upward sloping?
the cost effect
Even though the cost of resources is unchanged in the short-run, average costs might increase (overtime pay, recruitment costs etc.) Producers will require higher prices to cover these extra costs
the misrepresentation effect
producers might think they are getting paid more for their products because it is becoming more popular and as a result they are encouraged to produce more
the profit effect
as the price level increases and the cost of factors product does not change, the difference between cost and revenue increases, resulting in more profit, motivating firms to produce more
Output will be supplied in an economy in a period of time when the price of factors of production time have not had the time to adjust to changes in AD and the price level
Long run aggregate supply
Output that will be supplied in a economy in a period of time when the prices of factors of production have fully adjusted to changes in AD and the price level
The Kenesian long run aggregate supply
The economy can operate at any level of output in the long run
The curve is represented as perfectly elastic at low levels of output, then upward sloping in the midrange, and finally perfectly inelastic
Low level of output - Section 1
When output and employment levels are low, firms can employ more resources without raising their prices
Businesses don't need to offer higher wages to attract workers
Rise in output - Section 2
When output rises from Y to Y1, firms begin to experience shortage of resources.
Businesses have to pay higher wages to attract workers
Raw materials will cost more as well as capital equipments
Full capacity - Section 3
When output reaches Y1, the economy is producing at full capacity
Economy is producing maximum output with existing resources
The Neoclassical long run aggregate supply
The LRAS curve is represented as a vertical line
Economies in the long run will always be operating at full capacity
shift in curve of aggregate supply
Causes of increase in quality of resources
Net emigration
Increase in the retirement age
Women entering the labor force
Discovery of new resources
Land reclamation
Advances in technology
Improvised education and training
The total output that producers in a economy are willing and able to supply at a given price in a given time period