2.6 - Aggregate supply as an influence on Australia’s economic activity

2.6 - Aggregate supply as an influence on Australia’s economic activity

1. Define: AS is the Represents the sum of quantity of goods and services supplied by firms such partnerships, franchises and government business enterprises.

2. Represents the sum of quantity of goods and services supplied by firms such partnerships, franchises and government business enterprises.

3. The development of aggregate supply-side theory

   • main determinant of economic activity.
   • Supply creates its own demand. More goods and services supplied, the more income is created and the greater level of demand and spending
   • can be overproduction and underproduction since spending should match incomes
   • Demand and supply work together

4. The effect of changes in aggregate supply on economic activity

   • long term - can increase economic activity and production by spending more. The economy will soon hit productive capacity and reach its limit for AS.
     • short medium term is AD
   • When productive capacity is reached, increases in volume of goods and services supplied can increase depending on a nations motivation to produce.
     • Capacity however depends on aggregate supply factors. These evoke both quantity of resources available and how efficiently they are used.
   • Motivation comes via profits
   • How more favourable aggregate supply side conditions can increase economic activity
     • nations productive capacity is reached, AS is limited and economy cannot grow. Economic activity will only expand if more favourable aggregate supply side conditions develop
       • eg) the discovery of additional minerals, technological breakthroughs, improved organisation skills, lower production costs, higher profits and increased work productivity.
     • When firms become more motivated due to these developments, the nations productive capacity or AS increases creating a sustainable plain for economic activity.
   • How less favourable aggregate supply side conditions can increase economic activity
     • cause productive capacity to shrink. Some of these developments are resources being depleted,
       • droughts, floods, storms, destroying of infrastructure and capacity, drop in worker efficiency, strikes and overall drops in business profits.
     • Regardless if the AD levels are sufficient, a fall in AS which reduce our potential and level of economic activity.
     • gov makes policies to control and make sure more favourable supply side conditions are put in place to lift AS
     • The development of more favourable supply side conditions can increase AS and sustain economic activity.
     • The development of less favourable supply side conditions can decrease AS and create reduced economic activity.

5. Aggregate supply and its supply sided determinants

   • AS - quantity of all goods and services produced by every Australian firm over a year
     • affects more long term, especially the business conditions that reflect the supply side conditions
   • If the supply side conditions affecting productions generally become more favourable, AS grows because firms are more willing and able to life productive activity. And vice verser