Aggregate Supply
This page delves into the concept of aggregate supply, another fundamental element in AQA A Level Economics notes. It explores both short-run and long-run aggregate supply, as well as the classical model of aggregate supply.
Definition of Aggregate Supply
Definition: Aggregate supply shows the total productive potential or output of firms in an economy at any price level at a given point in time.
Short-Run Aggregate Supply (SRAS)
The page illustrates the short-run aggregate supply curve and its determinants:
Vocabulary: SRAS refers to the total output firms can produce in the short term, where some factors of production are fixed.
Determinants of SRAS include:
- Raw material prices (influenced by exchange rates)
- Wages (cost of labour)
- Interest rates and taxes (e.g., VAT)
- Productivity (output per worker, per time period)
Long-Run Aggregate Supply (LRAS)
Definition: Long-run aggregate supply represents the economy's productive capacity when all factors of production are fully employed.
The classical model of LRAS is depicted as a vertical line, suggesting that in the long run, output is determined by the quality and quantity of factors of production, not by the price level.
Highlight: The interaction between aggregate demand, short-run aggregate supply, and long-run aggregate supply explains how economies adjust to shocks and return to long-run equilibrium.
Adjustments in the Long Run
The page explains how the economy adjusts in the long run:
- If aggregate demand increases, it initially leads to higher output and prices.
- This increase in the cost of living prompts workers to demand higher wages.
- Higher wages increase production costs, shifting the SRAS curve leftward.
- The economy returns to its long-run equilibrium output (Y*) but at a higher price level.
Example: If there's an increase in government spending, it might temporarily boost output above the long-run level. However, as prices and wages adjust, the economy will eventually return to its long-run output level, but with higher prices.
This process demonstrates the self-correcting nature of the economy in the classical model, emphasizing the importance of understanding both short-run and long-run dynamics in A Level Economics.
