1.3 Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

The total output of goods and services that firms in an economy are willing and able to supply at a given price level, in a given period of time

Question 2

What is the short run?

Answer 2

The period of time when prices of factor inputs are fixed (eg. wages)

Question 3

Why is the SRAS upwards sloping?

Answer 3

An increase in price level will cause an increase in firms’ profits thus they can afford to increase production. This causes an extension of aggregate supply

Question 4

What causes the SRAS to shift

Answer 4

Changes in costs of production for firms

Question 5

What does the LRAS show?

Answer 5

The potential or full capacity level of output

Question 6

What can cause the LRAS to shift?

Answer 6

• Changes in the size of the workforce
• Technological progress
• Improvements in education and skills
• Government policy towards businesses
• Increase geographical and occupational mobility of labour