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MACRO – Aggregate Supply (AS) key macroeconomic concept Aggregate Supply • The total output of goods and services that producers in an economy are willing and able to supply at a given price level, in a given period of time. The Short Run Aggregate Supply Curve (SRAS) Price Level SRAS1 SRAS curve indicates the total output domestic producers are willing and able to supply in a time period when the prices of factor inputs, including labour and raw materials, remain unchanged. Wages in particular are often inflexible due to contracts, minimum wage legislation and trade union involvement Pl2 At higher price levels, firms can cover any extra wage costs (such as overtime for workers) and can increase output. Also firms are willing to supply more at higher price levels as profit margins are likely to rise with higher prices. Pl1 Y1 Y2 Real GDP Shifts in the SRAS curve Price Level SRAS1 SRAS2 A change in any factor affects the costs of production, will cause a shift of the AS curve. A shift in the curve indicates AS has changed at each and every price level What might cause a change in the costs of production (for a lot of firms in the economy) PL1 Y1 Y2 Real GDP It is important to be able to explain why this would occur, through the effect on the costs of production. Increases in AS Price Level SRAS1 SRAS2 Possible causes of an increase in aggregate supply, shown by a shift in the AS curve to the right (ASAS1) Includes: • A reduction in real wage rates eg. Due to a change in the minimum wage • A fall in raw material costs eg. Oil prices • Change in corporation tax • Increased factor productivity • Lower costs of finance •Supply side shocks, i.e. – a significant increase in energy costs as a result of conflict in oil/gas producing regions. •Reductions in costs associated with bureaucracy (red tape). PL1 Y1 Y2 Real GDP Using AS and AD analysis (using short run aggregate supply - SRAS) SRAS1 Price Level PL1 AD1 Y1 Real GDP Using AS and AD analysis (using short run aggregate supply - SRAS) Price Level A rise in AD, shown by a shift of the AD curve from AD1 to AD2, results in an increase in real output from Y1 to Y2 and an increase in the average price level from PL1 to PL2 SRAS PL2 PL1 AD1 Y1 Y2 Real GDP AD2 Using AS and AD analysis (using short run aggregate supply - SRAS) Price Level A fall in AD, shown by a shift of the AD curve from AD to AD1, results in an fall in real output from Y to Y1 and a fall in the average price level from PL1 to PL2 indicating a fall in the rate of inflation SRAS1 PL1 PL2 AD1 AD2 Y2 Y1 Real GDP Task 1. Explain one factor that might cause a fall in SRAS. • Illustrate and explain what impact this is likely to have on an economy in the shortrun 2. Explain one factor that might cause a rise in SRAS. • Illustrate and explain what impact this is likely to have on an economy in the shortrun Next…Long- run equilibrium