6.2: Aggregate Supply (AS)

6.2: Aggregate Supply (AS)

1. Definition: The Aggregate Supply shows the total output that will be supplied at different price levels of that output, ceteris paribus.

   • Assumption: Input prices remain fixed; the level of tech & qty and quality of resources within economy remains constant. When these assumption change, the AS curve will shift.
     • The AS curve slopes upwards as under these consumptions, output is more profitable at higher prices.

2. Aggregate Supply Curve

   • 1) The Horizontal (Keynesian) Range:
     • This corresponds to a point within PPC.
       • Factories operate at less than capacity & many are unemployed/idle factors of production.
         • It's possible to increase output level w/o pressure on prices as there is sufficient resources for all producers and hence, there is little need for producers to compete and bid up prices of resources.
   • 2) Upward Sloping (Intermediate) Range:
     • This corresponds to a point within and close to PPC.
       • Most available factors of production have been utilised; only some excess/spare capacity in certain parts of the economy. Thus, Only price of certain g/s will increase.
         • Begining of supply constraints, reaching bottle neck capacity -- Firms have to start using less efficient resources, which results in increase in COP per unit output.
           • Thus, firms will only be induced to increase output if they can be compensated with higher prices to cope with higher unit COP.
   • 3) Verticle (Classica) Range
     • Corresponds with a point on the PPC.
       • Absolutely no excess/spare capacity. All factors of production are already fully utilised; there is no more idle resources.
         • Thus, economy is at full employment. Meaning that national output can no longer increase unless AS/productive capacity increases.
           • It is impossible to increase production of g/s and any more increase in AD will only lead to increase in GPL.
             • The corresponding level of national output is known as potential output / full employment level of national income (Yf)

3. FACTORS AFFECTING SHIFT IN AS CURVE

   • AS relates the GPL to the output of the g/s produced by an economy over a given period of time, holding resource qty, quality, price and tech constant.
   • Changes in inout prices and productive capacity of economy due to qty quality of resources, and tech will cause AS to shift.
   • 1) Changes in input prices
     • A rise in input prices (labour,oil) increases COP and shifts AS curve upwards.
       • This is because at each GPL, firms are only willing and able to sell at a lower qty of real national output. The opp. holds true when input prices falls.
   • 2) Changes in Quality/ Quantity of output
     • Improvements in productivity of resources (labour) and hence quality of inputs, will improve the economy's long term ability to produce more g/s at each price level. This will cause AS curve to shift right.
       • EG: The shrinking fertility rate and rapidly ageing population in sg will reduce qty of labour input. if not addressed, this will cause AS to shift left (decrease in LRAS), because of the reduction in long run productivity capacity.
   • 3) Changes in Technology
     • Technology is the key to expanding an economy's productive capacity. Economic growth today is very much drive by tech adv and entreprise.
       • Computer, internet and specialied software have led to many cost savings (ATM, Baecode scanner, biotech) and increased productivity across the board.
         • These improv in tech enables producers to lower costs by producing more output w a given qty of input, Thus, AS curve shifts to the right to reflect increase in productive capacity (Increase in LRAS)
   • 4) Govt Policies
     • EG: Lowering GST or providing subsidies and grants to firms will lower COP and increase AS, shifitng AS curve downwards (Increase SRAS)
       • Reduction in corporate tax rate, increases post-tax profit, while is likely to increase investment. This will lead to increase in qty and quality of inputs, increasing productive capacity of country and therefore increase AS, where AS curve shifts right (Increase in LRAS)
         • Reduction in foreign worker levy would encourage firms to employ more foreign workers, increasing qty of labour and therefore increase productive capacity, where AS curve will shift to the right (Increase in LRAS)

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