·If successful they will shift aggregate supply AS to the right and enable higher economic growth in the long run There are two main types of supply side policies Free market supply side policies involve policies to increase competitiveness and free market efficiency For example privatisation deregulation lower income tax rates and
·Shape of long run aggregate supply A distinction between the Keynesian and classical view of macroeconomics can be illustrated looking at the long run aggregate supply LRAS Classical view of Long Run Aggregate Supply The Classical view is that Long Run Aggregate Supply LRAS is inelastic This has important implications
Figure 1 The Aggregate Supply Curve Aggregate supply AS slopes up because as the price level for outputs rises with the price of inputs remaining fixed firms have an incentive to produce more and to earn higher profits The potential GDP line shows the maximum that the economy can produce with full employment of workers and physical capital
·The SRAS curve is upward sloping due to two reasons The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward sloping As real output increases firms have to spend more to increase production wage bills will increase Increased costs result in higher average prices A movement along the SRAS curve
An aggregate supply curve ASC is the graphical representation of the number of goods or services produced in relation to price changes Short run and long run are the two final domestic supply types They are explained below #1 Aggregate Supply in Short Run The short run final domestic supply is driven by price
The upward sloping aggregate supply curve in Figure captures both market conditions to show the output producers are willing to produce and the price level The aggregate supply curve is drawn based on the assumptions that money wage rates and all other conditions except price that might affect output decisions are constant
The two types of aggregate supply are Short run aggregate supply Long run aggregate supply How do you find the aggregate supply curve To draw the aggregate supply curve you have to take into account other factors like the short or long run because those factors change the curves
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