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Candidates should be able to define short-run aggregate supply and identify the determinants of the short-run AS curve, such as money wage rates, business.

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Presentation on theme: "Candidates should be able to define short-run aggregate supply and identify the determinants of the short-run AS curve, such as money wage rates, business."— Presentation transcript:

1 Candidates should be able to define short-run aggregate supply and identify the determinants of the short-run AS curve, such as money wage rates, business taxation and productivity.

2 Real national output Price level SRAS Y1 P1 Y2 P2 Price level – because we are now looking at the average price for all goods and services not just one product This is the value of the output of all the goods and services produced in the given time period. The ‘real’ means the numbers are adjusted for inflation We could use Q for quantity here. Y stands for national income and because the value of output is the same as national income many texts use a Y Short run is the Period the time period when at least one factor of production is fixed in supply

3 Real national output Price level SRAS Y1 P1 Y2 P2 The AS (or SRAS) curve is the summation of all the individual supply curves of each firm which all slope upwards because, other things being equal, a higher price means higher profits and it is the profit motive, we assume, that motivates firms.

4 Real national output Price level SRAS 1 Q1 P1 SRAS 2 Q2 A change in: costs of raw materials, money wages, Productivity, taxes on businesses, moves the whole SRAS curve A change in: costs of raw materials, money wages, Productivity, taxes on businesses, moves the whole SRAS curve

5 Real national output AS Yfe Price level P1 In the 1930s Keynes was most worried about unemployment. He thought the macro economy did not work in the same way as markets did at a micro level. It was possible to have equilibrium in the goods and services market at a level of AD that was too low to achieve a level of national income where there was full employment (Yfe)

6 Real national output AS Yfe Price level AD1 AD3 AD2 P1 Y1 Y2 P3 Keynesians saw AS as perfectly elastic. As AD increases, supply increases until Yfe is achieved (i.e. the economy is on the PPF). Any increase in AD beyond Yfe is inflationary as AS becomes perfectly inelastic. Yfe is the full- employment level of national income

7 Real national output AS Yfe Price level AD1 AD3 AD2 P1 Y1 Y2 P3 P2 As output increases spare capacity is reduced and ‘bottlenecks’ in production occur, output can still increase but the prices of the factors of production are bid up too. So AS gradually curves upwards Beyond Yfe the economy is on the PPF and an increase in AD just results in price increases.

8 Real national output AS Yfe Price level AD1 AD3 AD2 P1 Y1 Y2 P3 P2

9 Real national output LRAS Price level One way of thinking about a Keynesian AS curve is that it is perfectly elastic in the short run……… …..and perfectly inelastic in the long run. Labeling the curve LRAS is common.

10 Real national output LRAS Yfe Price level

11 Real national output LRAS Yfe Price level Free market economists believe in “Say’s Law”, meaning “supply creates its own demand”. In the long run markets always achieve equilibrium and so AS is perfectly inelastic. We might call these economists “SUPPLY SIDERS”

12 Real national output LRAS Yfe Price level Free market economists believe in “Say’s Law”, meaning “supply creates its own demand”. In the long run markets always achieve equilibrium and so AS is perfectly inelastic.

13 Real national output Yfe Price level AD3 AD2 AD1 P1 P2 P3 Any increase in AD merely leads to a higher price level. LRAS

14 Real national output Yfe Price level AD3 AD2 AD1 P1 P2 P3 LRAS

15 Real national output LRAS Yfe Price level AD3 AD2 AD1 P1 P2 P3

16 Real national output SRAS Yfe Price level AD3 AD2 AD1 P1 P2 P3 A few new classical economists even used to say SRAS is vertical and because of rational expectations any increase in government spending immediately causes prices to rise. This sometimes get changed to the “NATURAL RATE OF UNEMPLOYMENT ” which is a monetarist idea

17 Real national output SRAS Price level A neo-classical/Keynesian consensus

18 Real national output SRAS Price level A neo-classical/Keynesian consensus LRAS Yfe

19 Real national output Price level SRAS 1 Y2 P1 SRAS 2 Y1 AD 1. Show what will happen if the price of oil on world commodity markets falls, and fill in the missing labels. P2

20 Real national output Price level P1 Y1 AD Show what will happen if the price of oil on world commodity markets falls, and fill in the missing labels. P2

21 Using a Monetarist/Free market LRAS curve show what will happen if the level of government spending increases.

22 Real national output Price level Using a Monetarist/Free market LRAS curve show what will happen if the level of government spending increases.

23 Real national output Price level Using a Keynesian AS curve show what will happen if the economy is currently in a slump and the level of government spending increases.

24 Actual GDP Trend Growth Short-run growth – percentage change in actual GDP Long-run growth – the productive potential of the economy increases (shown by the trend line)

25 Actual GDP Trend Growth HYSTERISIS occurs when a recession/depression leads to a loss of skills and deterioration in infrastructure and capital so that the productive potential is harmed and the rate of long-run growth is reduced

26 PPF1 PPF2 Real National Income Price level Short-run growth – percentage change in actual GDP Long-run growth – the productive potential of the economy increases.

27 LRAS1LRAS2 Real National Income Price level

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29 Actual GDP Trend Growth = productive potential of the economy Negative output gap Positive output gap A positive output gap occurs when actual GDP is greater than potential GDP. A negative output gap occurs when actual GDP is less than potential GDP.

30 Real national output LRAS Yfe Price level SRAS1 AD Y1 A negative output gap

31 Real national output LRAS Yfe Price level SRAS1 AD Y2 A positive output gap SRAS2 (unsustainable in the LR)

32 AS Macroeconomics

33 LRAS1 Real National Income Price level LRAS2

34  Supply-side policies are policies that improve the productive potential / capacity of an economy.  Supply-side policies can be implemented by the public or the private sector.

35 Competition policy including privatisation/nationalisation. Deregulation and regulation. Policies aimed at stimulating entrepreneurship and the expansion of smaller businesses Labour market reforms including tax and benefit changes, migration policy Trade policies including membership of the EU single market and WTO commitments Policies designed to increase spending on investment and research

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47 The key supply-side concepts to focus on are incentives, enterprise, technology, mobility, flexibility and efficiency. Improve incentives to find work Increase labour and capital productivity Increase the occupational and geographical mobility of labour Increase capital investment and R&D spending by firms Promote competition and stimulate invention and innovation Provide a platform for sustained non-inflationary growth of an economy

48 In Oct 2008, lone parents had move onto JSA and look for work once their youngest child reached the age of 12 rather than 16. In Oct 2010, lone parents had to switch to Jobseekers Allowance (JSA) even earlier, to when their youngest child is seven Evaluation is it in the long-term interest of society’s well- being to encourage single mothers to leave their children so early on in their childhood?

49 That’s all


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