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Short run aggregate Supply

Short run aggregate Supply. Learning objectives. To appreciate the difference between the short run aggregate supply (SRAS)curve and the long run aggregate supply (LRAS) curve To be able to distinguish between inward and outward shifts of the short run aggregate supply curve

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Short run aggregate Supply

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  1. Short run aggregate Supply

  2. Learning objectives • To appreciate the difference between the short run aggregate supply (SRAS)curve and the long run aggregate supply (LRAS)curve • To be able to distinguish between inward and outward shifts of the short run aggregate supply curve • https://www.youtube.com/watch?v=UwAQRnpVMzI

  3. Aggregate Supply (short run, Classical) • In the short run the firm’s fixed costs are said to remain constant. • An increase in demand can be matched by an increase in output by paying existing workers more. Price level SRAS1 Real output

  4. Aggregate Supply (short run, Classical) • Changes in the firms factor costs shift the SRAS curve. • Land. An increase in imported raw material prices. (macroeconomic) • Labour. An increase in money wage rates. (macroeconomic) • Capital. An increase in interest rates. (macroeconomic) • Entrepreneurship. An increase in corporation tax. (macroeconomic) Price level SRAS2 SRAS1 Real output

  5. Aggregate Supply (long run, Keynesian) • The price level makes reference to the retail price index (RPI). • Real output refers to the quantity of goods and services produced in the economy. • 0A refers to the level of output where the factors of production are used to the optimum. • As output beyond 0A the factors of production become scare, this is most notable in the labour market. • The scarcity causes their price to rise thus increasing the price level. • There comes a point at which the factors of production become exhausted. This is most notable in the labour market and is known as the full employment level of output. Price level AS Real output A B Optimum Capacity output Full Capacity output 0

  6. Aggregate Supply (long run) • The long run aggregate supply curve (LRAS) is vertical when all factors of production are fully employed. Price level LRAS1 Real output

  7. Aggregate Supply (long run, Classical) • The LRAS will shift as a there is a change in the availability of the factor of production. • Land - The discovery of new natural resources. • Labour - an increase in the working population • Capital - Improvements in technology • Entrepreneurship- Improvements in entrepreneurial culture (a more free market approach to running the economy). Price level LRAS1 LRAS2 Real output

  8. Short run and long run aggregate supply curve • https://www.youtube.com/watch?v=WSM2U-U6u34&t=166s

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