Download Topic 2.3. Aggregate supply student version

2.3.1 Unit content – the characteristics of AS
Students should be able to:
• Draw an AS curve
• Distinguish between movement along, and a
shift of, the AS curve
• Explain the relationship between short-run and
long-run AS
2.3.1 What is aggregate supply?
2.3.1 What is SRAS? What does it include?
What is the short run?
SRAS =
 It is the costs of production e.g.


The short run is when the prices of the factors of
production are fixed (e.g. wages) and in the short
run the AS curve slopes gently ____________.
2.3.1 Explanation of the short run: “the short run is when
the prices of the factors of production are fixed”
If firms wish to increase output they are unlikely to
take on more staff quickly. So they could pay
______________ to existing staff.
 This would __________ costs and hence prices
will ________
 Hence SRAS tends to be relatively __________
since increasing real output will cause a small
increase in the price level
 Draw a SRAS curve:

2.3.1 What factors may cause a movement?
Movements along the AS curve occur when AD
shifts and so real o_______ changes and hence
the ________ level changes.
 If there is a decrease in Aggregate Demand,
Aggregate Supply will c_______ and firms will
produce ______
 Sketch this

2.3.1 What factors may cause a shift in
aggregate supply? What are supply-side
shocks?
Supply-side shocks are large changes that cause
the short-run AS curve to shift e.g. doubling of oil
prices, if costs increase there is a ________ in AS
 This is shown by a _______ shift in the AS curve.

2.3.2 Unit content: Short-run AS
Students should be able to:
• Analyze the factors that influence short-run
AS: changes in costs of raw materials and
energy; changes in exchange rates; changes in
tax rates
2.3.2 List factors that will shift the short-run AS
2.3.2 Notes on tax: corporation v income tax
What would be the impact of a reduction in
corporation tax?
 It would
 What would be the impact of a reduction in income
tax?
 It would

2.3.2 Notes on productivity

What is productivity?

What is the impact of an increases in productivity
(e.g. due to a better educated workforce)?

However, it would also reduce costs of production
in the short run, so shifting SRAS downwards
2.3.3 Unit content: Long-run AS
Students should be able to:
• Explain different shapes of the long-run AS
curve: Keynesian and classical
• Assess factors influencing long-run AS:
technological advances; changes in relative
productivity; changes in education and skills;
changes in government regulations;
demographic changes and migration;
competition policy
2.3.3 What is the LRAS curve? What does it look
like? (classical view)
Price level
Real output
The long run
aggregate supply
curve (LRAS) is
the long run level
of real output
which is
sustainable given
the current
quantity and
quality of the
economy's scarce
resources.
2.3.3 Why is the LRAS curve a vertical line?
As prices rise, firms are willing to supply more but
there comes a point where firms reach maximum
capacity and so are unable to supply anymore.
 This is known as full employment. At this point the
supply curve is vertical.
 This can be shown as a ?

2.3.3 Question on a vertical LRAS
NOTE – remember that a vertical LRAS curve
shows the productive potential of an economy
so a change in raw material prices will NOT shift
it, but will cause a movement along the curve.
However, a change in raw material prices will
shift SRAS.
 LRAS only shifts if the productive potential of the
economy changes.

2.3.3 Keynesian approach to LRAS
Traditional Keynesians argue that, even in the
long-run, unemployment may exist
 If there is mass unemployment output can be
increased without any increase in costs (or prices).
 Only as the economy nears full employment would
higher output lead to higher prices
 At full employment firms cannot produce anymore
regardless of price

2.3.3 What is happening at low levels of
output? Select the correct word:
At low levels of output AS is completely
elastic/inelastic (where the curve is
vertical/horizontal).
 This means there is/isn’t spare capacity in the
economy, so output can decrease/increase without
a rise in the price level.
 E.g. what will firms be able to do if there is a lot of
unemployment in an economy?

2.3.3 What is happening when the curve starts
to slope upwards?
When the curve begins to slope upwards, this
shows the economy is experiencing problems with
supply (bottlenecks) which are causing increases
in costs.
 Why might this happen?


What happens to the elasticity of supply as the
economy gets close to capacity?
2.3.3 When does the curve become vertical?
The curve becomes vertical when the economy is
at full capacity: AS is completely elastic/inelastic.
 All resources are being used to their maximum
potential and output can’t increase any more.
 What will happen if firm X wants to increase
output?

2.3.3 LRAS diagrams
What is happening
for output between
0 and Y1?
What about at Yf ?
2.3.3 What is spare capacity?
Spare capacity is where there are _____________
resources in the economy.
 If an economy can increase output without
significantly increasing costs (AS curve is NOT
vertical) then there is spare capacity
 This means that there are unused resources in the
economy and hence unemployment.

2.3.3 What are the Keynesian and classical
approaches to AS?
The Keynesian approach is the view that there can
be equilibrium unemployment, and ____________
can take action to stimulate aggregate demand to
achieve long-term growth and employment.
 The classical approach is that markets work best if
________________. If there is unemployment then
labour markets should be left to themselves.
Wages will fall until people find work. Hence the
AS curve is vertical in the long run.
