AS Macro Economics Revision - 2
More detailed AS Revision Notes at Economic Help
Aggregate Supply AS
Short Run Aggregate Supply curve SRAS.
· Shifts in the AS can be caused by
1. Changes in Labour costs
2. Changes in Raw Material costs
3. Taxation and subsidies
Long Run Aggregate Supply Curve
In the Long Run classical economists argue that the productive capacity of the economy is determine by factors other than price and demand. They argue that in the long run AS is determined by:
1. The Labour Force
2. The Capital Stock
3. Available Land
4. Technology
5. Productivity
Economic Growth
· Economic Growth means an increase in Real GDP, this is an increase in the volume of goods and services produced in an economy
· The Rate of economic growth measures the annual % change in Real GDP
· An increase in the productive capacity of an economy is known as an increase in potential growth.
· The Long Run Trend Rate of Economic Growth:
This refers to the average sustainable rate of economic growth in an economy. For example in the UK this is about 2.5%.
· Therefore this is the rate of increase in LRAS and the productive capacity of the economy
Benefits of Economic growth:
1. Higher Incomes,
Consumers will be able to enjoy more goods and services
2. Lower unemployment:
With higher output firms will employ more workers
3. Lower Government Borrowing (PSNCR),
Economic growth creates higher tax revenues and there is less need to spend money on unemployment benefits
4. Improved public services.
More can be spent on the NHS and education e.t.c.
Costs Of Economic Growth
1. Inflation.
If AD increases faster than AS then economic growth will be unsustainable. The output gap will narrow causing inflation to increase. This is lonely likely occur if growth is higher than the long run average growth rate
2. Boom and Bust Economic Cycles.
If Economic growth is unsustainable then high inflationary growth may be followed by a recession. This occurred in the late 1980s
3. Balance Of Payments Deficit.
Increased Economic growth causes an increase in spending on imports therefore causing a deficit
4. Environmental Costs.
Increased economic growth will lead to increased output and therefore will cause increased pollution and congestion.
5. Increased Inequality:
Higher rates of economic growth have often resulted increased inequality. However this depends upon things such as tax rates and the nature of economic growth
