The Characteristics of Aggregate Supply

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

The Characteristics of Aggregate Supply

What is Aggregate Supply?

Aggregate Supply is the total amount of goods / services that firms are willing to supply at various price levels and throughout a given time period.

Upward Sloping AS Curve – the Aggregate Supply curve is upward sloping in the Short Run, suggesting a positive relationship between price level and the quantity of goods / services.
Rising Costs – As Price Level rises – firms are willing to supply more goods / services – hence aggregate supply also increases. With this, firms are faced with rising costs.
Maximum Capacity – firms can only increase their supply until they reach Maximum Capacity, which is known as Full Employment and occurs in the Long Run – depicted by the AS curve becoming a straight vertical line.
Spare Capacity – this occurs when the economy experiences an increase in output without facing a huge rise in prices. There are unemployed resources circulating in the economy

Short-Run Aggregate Supply

Capital is fixed – in the short term, the amount of capital remains the same
SRAS is Elastic – firms are able to increase their output (or decrease if need be) by altering the hours and amount of work that employees do

Factors causing a shift in the SRAS

Prices and costs of raw materials / commodities
Levels of taxes or subsidies available to firms
Cost of labour – wages
Change in Exchange Rates

Long-Run Aggregate Supply

Classical View of Long-Run Aggregate Supply

AS is inelastic – the classical view suggests that in the long-term, the economy will maintain fully employment; it sees wages and prices as flexible. Classical Economists also believe that long-term factors such as capital, technology, productivity will influence economic growth
LRAS is a vertical straight line – because the classical view suggests AS is inelastic, LRAS remains a vertical straight line

Keynesian View of Long-Run Aggregate Supply

LRAS is elastic – the Keynesian view suggests that the economy can be operating below Full Employment, even in the long run. This is depicted by an upward sloping and elastic LRAS curve
Wages and prices can be sticky – because of the assumption that wages and prices can be sticky, it is difficult for economies to return to fully employment equilibrium

Factors causing a shift in the LRAS

Land and raw materials
Technology advancements
More capital available
Better quality / skillsets of employees
Government Policies

What causes a movement in the AS curve?

Price is the main factor causing a movement along the AS curve

Quick Fire Quiz – Knowledge Check

1. Explain what Aggregate Supply is (2 marks)

2. Using a diagram, explain the characteristics of Aggregate Supply in the short-run (8 marks)

3. Identify four factors causing a shift in the SRAS curve (4 marks)

4. Using a diagram, explain the difference between the Classical View and Keynesian View of Aggregate Supply in the Long-Run (8 marks)

5. Identify five factors causing a shift in the LRAS curve (5 marks)

6. Identify the factor causing a movement along the AS curve (2 marks)

7. How would a decrease in the price of oil affect the short run aggregate supply curve? use a diagram to show the impact.

8. Using a diagram show how technological advancements would impact long run aggregate supply

9. A government implements a policy that significantly increases investment in technology and innovation while simultaneously raising income taxes on consumers to fund this investment. Using a diagram show how this policy is likely affect the Long-Run Aggregate Supply (LRAS) and Aggregate Demand (AD) curves.

10. A sharp rise in oil prices increases production costs for many firms, while the government launches a large stimulus package to boost consumer spending. How would these two events affect the Short-Run Aggregate Supply (SRAS) and Aggregate Demand (AD) curves? Use a diagram to show the impact.

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