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Section 7 - Aggregate supply - Coggle Diagram
Section 7 - Aggregate supply
Curves
Aggregate supply is the total output produced in an economy at a given price
SRAS
Short run aggregate supply
Increase in price level, increase in amount of output firms are willing to supply (extension of supply)
Curve will shift if there is a change in the cost of production
Reduction in production costs means more output can be produced so a shift right
Changes in wage rates, taxes, exchange rates and efficiency cause shifts
Slope upwards
Classical LRAS
Long run aggregate supply
Determined by the factors od production which affect capacity of the economy
In long run, all resources are assumed to be used at full capacity, so output will stay constant no matter the price, so the curve is vertical
Improvement in factors of production icnreases capacity and cause a rightward shift
Improvements in education, skills and healthcare increase output potential too
Assumes the economy always operates at or close to full capacity
In a classical world
Free market economies are always stable
Tend towards full employment
Freely fluctuating prices
Keynesian LRAS curve
Inverted L shape
Keynes argues that a depressed economy can settle into an under-full-employment equilibrium
Keynes believed that without government intervention, an economy could display more or less permanent demand deficiency
If the governmnet could shift AD to the right along horizontal section, the existence of a space capacity would lead to a growth in real output without an increase in price level
When maximum normal capacity is achieved, LRAS become vertical for the same reason as the classical LRAS curve
In a Keynesian world
Free market economies are unstable
Supply wil adjust to demand as demand is a much bigger driving force
Demand creates its own supply
Factors influencing LRAS
Technological advances - more spent on improving technology, the economy can produce goods in large volumes
Changes in relative productivity - more productive labour/ capital produced a larger quantity of output
Education - improves quality of human capital
Regulation - can limit how productive and efficient a firm can be
Competition - more competitive market forces firms to be more efficient
Macro equilibrium
Increase in AD
Short run
Output increase, which will lead to an increase in derived demand, so more jobs are create and unemployment is reduced
Rise in prices
Decrease in AD has the opposite effect
Long run
Output doesn't change as economy is at full capacity
Only effect is that price rise - demand pull inflation
Spare capacity
Alot
Initial injection shifts the AD curve and lead to a large rise in output
AS is very elastic, alot of spare capacity
Not alot
Inelastic AS, much less spare capacity
Initial injection cannot be multiplied
Small rise in output, large rise in price
Shifts in AS
SRAS
More jobs, less unemployment, price leves falls and economy is more competitive
Balance of payments improve
Shift in AS leads to an increase in capacity, and output
LRAS
Similar results to SRAS
Incerase in long run output, price level falls, and economy remains at full employment
Cause four macro policy indicators to improve/ worsen
Keynesian LRAS
AD
If economy is at full capacity, an increase in AD leads to an increase in price, but not output
If economy isn't at full capacity, an increase in AD lead to an increase in output, but not price
AS
If LRAS increases and the economy is at full employment, output could increase
If economy isn't at max capacity, there is no change in equilibrium
Keynes said there is little point in aiming to increase AS during a depression, and equilibrium won't be affected and there won't be an increase in output or employment