Overview of AS, both SRAS and

1. Aggregate Supply
The Sum of all planned domestic
production at a given general
price level per period

2. SRAS/LRAS?
• There are two types of Aggregate Supply
• Short Run Aggregate Supply
• Long Run Aggregate Supply

3. Short Run Aggregate Supply
• This assumes that prices of all factors are fixed
• As you supply more, more must be paid

4. Shifts in the Curve
• Like AD the SRAS curve can shift.
• If there is a shift to the left it can mean costs
of production may have risen (Cost Push
Inflation)
• Should there be a shift to the right, costs of
production may fallen.
• It is easier to look at a question of SRAS and see
if what has happened will affect the cost of
production.

5. Shifts in the Curve

6. Long Run Aggregate Supply
• In the long run wage rates and input prices will
change.
• You need to know the two main view on LRAS
– Neo-Classical View
– Keynesian View

7. Neo-Classical View LRAS
• This states that LRAS is a vertical line.
• These economists argue that there is a
tendency to full employment as wages will fall
until full employment is restored.
• This means that they believe the economy in
the long run will operate at full employment

8. Neo-Classical View LRAS

9. Keynesian LRAS Curve
• The curve is different
• They believe that in the Long Run
unemployment will always exist as wages are
sticky downwards
• This means that should AD fall, workers will
resist cuts in pay and the economy will not
return to full employment as the classical
economists say

10. Keynesian LRAS Curve
• Keynesians say that at low levels of output
there is low levels of employment, the curve
will be horizontal
• This is due to spare capacity in the economy
• This means output can be increased without a
cost rise
• Once pressure is placed on the capacity and
inputs become in short supply such as skilled
workers , the curve slopes up
• Once you reach full employment you cannot
raise output anymore so the curve is vertical

11. Keynesian LRAS Curve

12. Shifts in the Curve
• Changes to LRAS are changes to the productive
potential of the economy
• Increase, shift right
– Quality of Inputs are increased e.g. Education in the
Labour Market
– Quantity of Inputs are increased e.g. size of labour
force
• Decrease, shift left

13. Case Study
• After the Second World War, many of Britain’s
soldiers were dead, which meant that the
productive capacity of the economy was
damaged due to a reduction in the labour force

14. Case Study
• However in 1964 the Baby Boom was fully
realised on the size of the labour force