Download short run aggregate supply

Short run aggregate supply
Syllabus snapshot
Today we are going to…….
1. Understand what is meant by the term
short run aggregate supply.
2. Understand why the SRAS curve is
upward sloping.
3. Understand why the SRAS curve
shifts.
Aggregate Supply
• The total supply of goods and services
that firms in a national economy plan
to sell during a specific time period.
• The total amount of goods and
services that the firms are willing to
sell at a given price level in the
economy.
• The relationship between the price
level and the production of the
economy .
SRAS/LRAS?
Short Run Aggregate
Supply
Long Run Aggregate
Supply
Why is the SRAS upward
sloping?
The Short run AS curve
(SRAS)
• Assumes that prices of factors of
production such as wage rates are
constant.
• Firms will supply extra output if the
prices they receive increase.
• SRAS = upward sloping.
• Increase in a firms costs of
production will shift the SRAS
curve upwards, a fall in costs will
shift it downwards.
Showing shifts in SRAS
Shifts in the Curve
• Like AD the SRAS
curve can shift.
• If there is a shift to the
left it means costs of
production may have
risen (Cost Push
Inflation)
• Should there be a shift
to the right, costs of
production have fallen.
Changes in Commodity prices
Price of oil increases
• Increase production
costs
• SRAS1:SRAS2
• New Equilibrium point B
• Price level (PL) has
increased P1:P2
• Income (Y) decreased
Yn:Y2
• Unemployment increases
• Rising prices and falling
output = stagflation
Changes in Commodity prices
Price of oil decreases
• Reduce costs for
business, increase
profitability.
• Consumers see a
reduction in cost of
transport and heating,
leading to higher
incomes
• Helps to reduce
inflation.
• Lower prices, more
spending power and
lower costs of business
can help boost economic
growth.
Increase in wage rates
Price level
SRAS2
P2
SRAS1
P1
0
Q1
Real output
Decrease in raw material prices
Price level
SRAS1
P1
SRAS3
P3
0
Q1
Real output
Increase tax burden on industry
Price level
SRAS2
P2
SRAS1
P1
0
Q1
Real output
Supply side shock
Long run aggregate supply
Syllabus snapshot
Long Run Aggregate Supply
(LRAS)
•
In the long run there is a limit to how much
firms can increase their supply.
•
They run into capacity constraints.
•
There is a limit to the amount of labour
that can be hired, capital equipment is
fixed in supply, labour productivity has
been maximised.
•
It can therefore be argued that the LRAS
curve is fixed at a given level of real
output.
LRAS – the productive potential
Services
Price level
LRAS
Can you think of the other curve that
shows the productive potential of an
economy?
PPF
0
Real output
In order to increase productive
capacity what would have to
happen?
0
Goods
Classical View LRAS
• Vertical LRAS curve is called the
classical long run aggregate
supply curve.
• Based on the classical view that
markets tend to correct
themselves quickly when they are
pushed into disequilibrium by
some shock.
• In the long run product markets
like the markets for oil, cameras or
meals out and factor markets
such as the market for labour will
be in equilibrium.
• If all markets are in equilibrium
there can be no unemployed
resources.
• The economy must be operating at
full capacity on its PPF.
LRAS
Keynesian view LRAS
• Keynesian economists argue that there have been
times when markets have failed to clear for long
periods of time.
• Keynesian economics was developed out of the
great depression of 1930’s when large scale
unemployment lasted for a decade.
• If it had not been for WW2 it is believed that large
scale unemployment would have lasted even
longer.
• Keynes argued that there is little point in drawing
a vertical LRAS curve if it takes 20 or 30 years to
get back to the curve when the economy suffers
a demand side or supply side shock.
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
What has to happen at Q3 for
there to be full employment?
•
•
•
•
•
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
Price level
Keynesian LRAS Curve
LRAS
Full
employment
output
Mass
unemployment
0
A
B
Real output
shifts in the LRAS
What do these shifts show?
Causes of LRAS shifts
• Education & training
• Investment in capital
equipment
• Technological advances
• Increased world
specialisation
• Improved work practices
• Changes in government
policy
Assuming the economy is in an initial
equilibrium at X, identify where the new
equilibrium will be, if:
There is an increase in
the number of labour
strikes which raises
average wages but
does not improve
productivity.
Assuming the economy is in an initial
equilibrium at X, identify where the new
equilibrium will be, if:
There is an oil shock
which raises oil
prices.
Assuming the economy is in an initial
equilibrium at X, identify where the new
equilibrium will be, if:
Labour markets are
deregulated to
enable greater
competition from
non-EU workers.
Assuming the economy is in an initial
equilibrium at X, identify where the new
equilibrium will be, if:
The exchange rate of
Sterling depreciates.