2.3.1 Unit content – the characteristics of AS Students should be able to: Draw an AS curve Distinguish between movement along, and a shift of, the AS curve Explain the relationship between short-run and long-run AS

2.3.1 What is aggregate supply?

2.3.1 What is SRAS? What does it include? What is the short run? SRAS = It is the costs of production e.g. The short run is when the prices of the factors of production are fixed (e.g. wages) and in the short run the AS curve slopes gently ____________.

2.3.1 Explanation of the short run: “the short run is when the prices of the factors of production are fixed” If firms wish to increase output they are unlikely to take on more staff quickly. So they could pay ______________ to existing staff. This would __________ costs and hence prices will ________ Hence SRAS tends to be relatively __________ since increasing real output will cause a small increase in the price level Draw a SRAS curve:

2.3.1 What factors may cause a movement? Movements along the AS curve occur when AD shifts and so real o_______ changes and hence the ________ level changes. If there is a decrease in Aggregate Demand, Aggregate Supply will c_______ and firms will produce ______ Sketch this

2.3.1 What factors may cause a shift in aggregate supply? What are supply-side shocks? Supply-side shocks are large changes that cause the short-run AS curve to shift e.g. doubling of oil prices, if costs increase there is a ________ in AS This is shown by a _______ shift in the AS curve.

2.3.2 Unit content: Short-run AS Students should be able to: Analyze the factors that influence short-run AS: changes in costs of raw materials and energy; changes in exchange rates; changes in tax rates

2.3.2 List factors that will shift the short-run AS

2.3.2 Notes on tax: corporation v income tax What would be the impact of a reduction in corporation tax? It would What would be the impact of a reduction in income tax? It would

2.3.2 Notes on productivity What is productivity? What is the impact of an increases in productivity (e.g. due to a better educated workforce)? However, it would also reduce costs of production in the short run, so shifting SRAS downwards

2.3.3 Unit content: Long-run AS Students should be able to: Explain different shapes of the long-run AS curve: Keynesian and classical Assess factors influencing long-run AS: technological advances; changes in relative productivity; changes in education and skills; changes in government regulations; demographic changes and migration; competition policy

2.3.3 What is the LRAS curve? What does it look like? (classical view) Price level Real output The long run aggregate supply curve (LRAS) is the long run level of real output which is sustainable given the current quantity and quality of the economy's scarce resources.

2.3.3 Why is the LRAS curve a vertical line? As prices rise, firms are willing to supply more but there comes a point where firms reach maximum capacity and so are unable to supply anymore. This is known as full employment. At this point the supply curve is vertical. This can be shown as a ?

2.3.3 Question on a vertical LRAS NOTE – remember that a vertical LRAS curve shows the productive potential of an economy so a change in raw material prices will NOT shift it, but will cause a movement along the curve. However, a change in raw material prices will shift SRAS. LRAS only shifts if the productive potential of the economy changes.

2.3.3 Keynesian approach to LRAS Traditional Keynesians argue that, even in the long-run, unemployment may exist If there is mass unemployment output can be increased without any increase in costs (or prices). Only as the economy nears full employment would higher output lead to higher prices At full employment firms cannot produce anymore regardless of price

2.3.3 What is happening at low levels of output? Select the correct word: At low levels of output AS is completely elastic/inelastic (where the curve is vertical/horizontal). This means there is/isn’t spare capacity in the economy, so output can decrease/increase without a rise in the price level. E.g. what will firms be able to do if there is a lot of unemployment in an economy?

2.3.3 What is happening when the curve starts to slope upwards? When the curve begins to slope upwards, this shows the economy is experiencing problems with supply (bottlenecks) which are causing increases in costs. Why might this happen? What happens to the elasticity of supply as the economy gets close to capacity?

2.3.3 When does the curve become vertical? The curve becomes vertical when the economy is at full capacity: AS is completely elastic/inelastic. All resources are being used to their maximum potential and output can’t increase any more. What will happen if firm X wants to increase output?

2.3.3 LRAS diagrams What is happening for output between 0 and Y 1 ? What about at Y f ?

2.3.3 What is spare capacity? Spare capacity is where there are _____________ resources in the economy. If an economy can increase output without significantly increasing costs (AS curve is NOT vertical) then there is spare capacity This means that there are unused resources in the economy and hence unemployment.

2.3.3 What are the Keynesian and classical approaches to AS? The Keynesian approach is the view that there can be equilibrium unemployment, and ____________ can take action to stimulate aggregate demand to achieve long-term growth and employment. The classical approach is that markets work best if ________________. If there is unemployment then labour markets should be left to themselves. Wages will fall until people find work. Hence the AS curve is vertical in the long run.