Short Run Aggregate Supply

Short Run Aggregate Supply

1. Total planned output of G&S/year when prices can change but CoP and productivity = constant

2. Shift - change in CoP

   • Unit labour costs
     • Wage cost adjusted for productivity
     • ↑ = ↑ wages / ↓ production
   • Other CoP
     • ∆ in rental cost, building materials, cost of fertiliser
   • Commodity prices
     • ∆ raw material cost
   • Exchange rates
     • ∆ prices of imported products
     • ↓ exchange rate, ↑cost of importing raw materials
       • Shift in
     • Very important
   • Gov tax and spending
     • ↑ tax = ↑ costs, shift in
   • Price of imports
     • Cheaper imports from lower-cost country, shift out
     • ↓ import tariff / ↑ import quota = ↑ supply, shift out
   • Short run shocks
     • Temporary non-economic
     • Natural disaster = ↓ production, political crisis, technology advances, sharp rise in oil/gas price

3. External factors

   • World oil and gas prices
     • Net importer of oil
   • Energy prices/costs
     • Net importer of coal
   • Mineral/metal prices
     • Electronics
   • Foodstuff prices
     • International prices
   • Import tariffs/quotas
     • EU sets common import tariff on G&S coming into EU Single Market

4. ∆ world oil prices effect D and supply-side of econ

   • Net importer of oil but also producer and exporter
   • ↓ oil prices = good for econ growth in UK as ↓ prices for consumers and businesses act like tax cut
     • Cheap fuel
     • ↓ value of oil exports & cheaper imports
     • ↓ extraction from North Sea
     • Renewable energy may not be econ. viable
     • ↓ energy costs, ↓ inflation (deflation risk)
     • Oil exporter - exchange rates may ↓, helping other export industries

5. Curve

   • Upward sloping curve
     • Responsive to ∆ in AD reflected in ∆ in PL
     • ↑ prices for G&S = output ↑ profitable & businesses can expand FoP
     • ∆ PL -> movement along the curve
     • ∆ other determinants (e.g. import costs) -> shift
   • Keynesian non-linear upward curve
     • Upwards curve, steeper as econ. approaches full output employment
       • Costs ↑ faster as approaches full employment
     • SR: can't change capital (fixed capital) ∴ ↑ output, ↑ variable FoPs (labour)
       • Diminishing returns at any wage rate (↑ workers to fixed capital = ↓ productivity)
         • Cost ↑ faster rate than output -> ↑ cost of producing extra units of output
     • Profit maximising firms ↑ output if price rise if prices ↑ to compensate ↑ CoP with extra output
     • Lots of spare capacity = elastic curve Near max output = inelastic (↓ returns, resources shortages - ↓ skilled labour) ↑ AD inflationary in SR - little extra output