Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Aggregate-Supply
Document related concepts
Transcript
What is Aggregate Supply And what is SRAS and LRAS? Aggregate Supply • the total volume of goods and services produced within the economy at a given price level Price Level • there is a positive relationship between AS and price level AS • rising prices signal to businesses to expand production to meet higher AD •as firms try to expand production, they need to increase prices in order to cover higher costs (eg. overtime workers) • AD → expansion of AS (movement along) GDP AS is determined by performance on the supply side of the economy; it reflects productive capacity and costs of production. Short-Run Aggregate Supply (SRAS) • The ‘short run’ is when there is at least one fixed factor of production – something cannot be changed Price Level SRAS • In the ‘short run’, wages and other costs are fixed • And change in production costs or wages would move firms to a new ‘short run’ •The SRAS represents firms’ planned production at that particular set of costs. GDP Shifts in Aggregate Supply • AS shifts from changes in production costs (labour, raw materials, taxes, subsidies) This SRAS could have been caused by: Price Level SRAS SRAS 1 - wage costs - raw material costs - taxes - productivity Real GDP - subsidies to firms. AD & AS – equilibrium (actual) Real National Output • A shift in one curve causes a movement along the other curve • The same economic event may cause both curves to shift (you need to know which one is the primary shift and which is secondary) Price Level Price Level AS AS1 AS P1 P1 P AD1 P AD Y Y1 AD Real GDP Y1 Y Real GDP Long Run Aggregate Supply • indicates the maximum potential output possible with given resources and technology, and is independent of the price level (similar to the PPF) • a theoretical ideal – not likely to be achievable, but we try to get as close as possible! • shifts outward with improvements in productivity & efficiency – shifts inward with decreases in the same Classical LRAS LRAS LRAS1 Price Level GDP A similar concept to the PPF… An increase in longterm potential of the whole economy (doesn’t necessarily mean we will actually grow!) What would shift LRAS outward? (and can it shift inward?) • technological advances • changes in relative productivity • changes in education and skills • changes in government regulations • demographic changes and migration • competition policy Classical LRAS and Unemployment Price Level LRAS SRAS SRAS1 P AD Yactual Yfull Real Output In the long run we assume the prices of factors of production (eg wages) are flexible, so since there is unemployment, there will be downward pressure on wages. This means firms costs will fall, which means SRAS shifts out, and we reach a long run equilibrium with full employment SRAS – in reality it’s probably curved… Price Level SRAS AD3 AD2 AD1 AD Real GDP • When AD is very low, it is easier (cheaper) for firms to expand output (lots of unemployed people and resources) so an increase in AD (AD – AD1)may encourage a larger increase in output with little increase in price level • When AD is very high, it is harder (more expensive) for firms to expand output therefore attempts to meet extra AD (AD2 – AD3) at this stage are likely to be more inflationary as it is harder (more expensive) to have more labour or resources Keynesian LRAS • If the classical view was correct, unemployment should only be temporary • Yet we have had periods of mass unemployment (1930s depression; Greece & Spain today) • John Maynard Keynes wrote on why this unemployment persisted in his book, ‘The General Theory of Employment, Interest and Money’ in 1936 • There are several reasons he believed unemployment can persist, but we look for the moment at just one: • Wages are ‘sticky’, ie they do not fall – or do not fall sufficiently • This may be because of laws such as minimum wages, or legal protection, or because firms do not want to demotivate their workers • This means SRAS will not shift out, and SRAS is effectively the same as the LRAS Keynesian LRAS and unemployment Keynsians think that unemployment may persist because wages don’t actually drop. So, when there is mass unemployment, output can increase or decrease without having an impact on price level. LRAS Price Level Mass unemployment Full employment GDP Classical LRAS & SRAS and inflationary pressure Price Level LRAS SRAS 1 SRAS AD1 AD GDP If AD increases such that the equilibrium is beyond LRAS (beyond max-capacity), firms will have to pay overtime, machines will break from overuse, etc – all of which will increase costs and reduce SRAS back to the LRAS equilibrium, but at a higher price level. Keynesian LRAS and inflationary pressure AD to AD1 – because of mass unemployment, firms can expand output without putting up prices (lots of extra workers to hire at low wages) LRAS Price Level AD5 AD4 AD1 AD AD3 AD2 GDP AD2 to AD3 – workers are starting to become more scarce so any increase in output will require paying slightly higher wages, increasing prices a bit AD4 to AD5 – the economy is at full capacity. Any increase in AD will only lead to increased prices and no extra output.
