Aggregate Supply

Aggregate Supply

1. Aggregate supply is the total output produced in an economy at a given price level over a given period of time

   • There are 2 types of aggregate supply curves that are important
     • Short Run Aggregate Supply Curve (SRAS)
       • The SRAS curve sloped from left to right. They show with an increase in the price level, there's an increase in the amount of output firms are willing to supply
         • If the SRAS is price inelastice the SRAS curve is more steep upwards
         • If the SRAS is price elastic, the SRAS curve would be less steep
       • Changes in Costs of Production causes the SRAS Curve to Shift
         • reductions the costs of productions = SRAS curve shift to the right e.g reduction in costs of oil/ wage rates/taxes
           • A sudden decrease in AS could be caused by supply-side shocks, such as natural disaster or war
     • Long Run Aggregate Supply Curve
       • In the long run, it is assumed that an economy will move towards an equilibrium where all resources are being used to full capacity (so the economy is running at its full productive potential)
         • The LRAS Curve is vertical. An increase in the price level e.g P1 to P2 won't cause an increase in output because the economy is running at full capacity, so it cant crease more output
       • Changes in factors of production cause the LRAS curve to shift
         • LRAS is determined by the factors of production, this will affect the capacity of the economy
           • E.g investment in advancement of technology and more efficient production will increase maximum output
             • Other examples include improvements in education (more productive individuals), demographic changes (skilled workers migrating to a country), supply of new resources, improvements in healthcare, changes to govt regulations (reducing regulations), increased competition, improving factor mobility

2. A rise in demand might cause an "Accelerated" increase in investment

   • The accelerator effect is when there's an increase in national income (GDP) which results in a proportionally larger rise in capital investment spending
   • Determine if investment is needed - if there's a rise in demand, increase investment (Accelerator process)
     • Likely to occur when economy is going through boom or recovery as demand will be rapidly increasing and firms need to meet this demand through investment
       • The multiplier and accelerator work together e.g during recovery AD will be growing, this leads to firms increasing their level of investment - which leads to further increase in AD.
         • This is then multiplied making growth in national income more rapid, which leads to even more "accelerated" investment

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