Aggregate Supply

Aggregate Supply

1. SRAS: the period of time when the prices of the FOPs do not change, labour price is fixed

   • a change in any of the factors other then price level will result in a shift of the SRAS
     • A change in wage rates: government raises min wage or trade unions
       • A change in the cost of raw materials: for example oil
         • A change in the prices of imports: rise in import prices will raise costs of production
           • Change in indirect taxes or subsidies

2. Supply Side Policies

   • Interventionist
     • Investment in Human capital
       • Research and development: tax incentives to increase R & D, tax credits, intellectual property rights, finance R & D development centres
         • Provision and maintenance of infrastructure
           • Direct Support for businesses/ industrial policies: improving the competitive nature of industries through maintenance of anti-monopoly laws, helping enterprises grow,
   • Market Based
     • reduction in household income taxes so there is more incentive to work harder
       • reduction in corporate taxes: if businesses are able to keep more profit there will be greater investment and investment in R & D- more incentive to be efficient
         • Deregulation- if governments have placed many regulations on businesses that increase costs of production this reduces potential output- environmental laws or working laws
           • Privatisation- privately owned, profit maximising firms will be more efficient than nationalised firms will be more efficient then nationalised firms
             • Policies to increase competition which encourages greater efficiency
     • Labour market reforms
       • reduction in trade union power
         • Reduction/ elimination of minimum wages
           • Reduction in unemployment benefits