Factors responsible for changes in aggregate supply, Macroeconomics

Assignment Help:

Factors Responsible for changes in Aggregate Supply

We know that changes in input costs such as wages, oil and other input prices will cause changes in aggregate supply. Most of the factors which affect the position of the aggregate supply curve in the short run also affect the position of the aggregate supply curve in the long run. However, there are situations when there is a shift in the short run aggregate supply curve which will have no effect on the long run aggregate supply curve. These factors are, changes in costs of production, supply disturbances, investment and technological changes. There are several factors which affect aggregate supply as explained below.

1. Change in Costs of Production: The short run aggregate supply curve indicates the level of the output that will be produced at a given level of price. An increase in the input costs such as labor or raw material costs, other things remaining constant, will reduce the output that the business firms are willing to supply at a given price level. Therefore the short run aggregate curve shifts upward from right to left.

However, an increase in the cost of producing any given level of output does not alter the long run aggregate supply curve, irrespective of changes in the costs in the short run. Similarly a reduction in the input costs will have the opposite effect on the short run aggregate supply curve, but again it will have no effect on the long run aggregate supply curve.

2. Supply Shock or Supply Disturbances: Any increase or decrease in current output is temporarily caused by occurrences of supply disturbances, or supply shocks. For example, favorable weather conditions will cause a bumper harvest while unfavorable conditions will cause a shortage. For economies which are predominantly agricultural like India, the effect on aggregate supply will be very significant. In such countries a natural calamity or disaster such as major floods and drought will also adversely affect aggregate supply. As these disturbances are of a temporary nature, with the return of normalcy the aggregate supply will return to the previous level.

3. Investment Spending and Technological Changes: The other important factors which influence the aggregate supply both in the short run and the long run are investment and technological progress. If other things remain equal, the productivity of an economy will increase with the investments in additional capital assets. Therefore, the three factors discussed above, namely costs of production, supply shocks, investment and technological change can shift aggregate supply curve in the short run, but will have no effect on the long run aggregate supply curve.

4. Availability of Raw Materials: The productive potential of any economy is determined by the availability of raw material which is an important factor of production. The availability and accessibility of additional raw materials input will expand the productive base of any economy. An increase in availability of raw materials initially costs low to businesses and this implies an outward shift in AS curve. Consequently with a fall in costs of production and constant price levels, the profits from any given level of production increase and therefore firms are encouraged to expand their output. Naturally the output is also on the higher side due to the availability of more raw materials.

5. Supply of Labor: The outward movement of both short run and long run aggregate supply curve is due to the increase in supply of labor, provided other things are constant. Other things remaining constant, in the short run, an increase in the labor supply will bid down the market wage and thus raise the profits for businesses from producing any given level of output. In the long run, the increase in supply of labor will enable an increase in the natural rate of output, which will enlarge the productive base of the economy.

6. Human Capital: It is a known fact that any economy with more highly skilled labor force has greater productivity. The nexus between the Human Capital and factors like education, training and health care have an important bearing on aggregate supply. Increase in training initiatives in order to raise the skill levels of the labor force will shift the short run aggregate supply curve as well as long run aggregate supply curve outwards.

7. Incentives: The role of incentives in improving the supply side of the economy is gaining considerable importance in the recent years. A lot of emphasis is laid on increasing incentives leading to an increase in productivity factors of production. Thus the incentives are considered as an important factor directly affecting the aggregate supply both in the short run and in the long run.


Related Discussions:- Factors responsible for changes in aggregate supply

What do you mean by wage inflation, Q. What do you mean by Wage inflation? ...

Q. What do you mean by Wage inflation? We will develop the Keynesian model removing the assumption of fixed nominal wages. We state wage inflation p w as the percentage averag

Example of indirect taxes and subsidies- accounting system, Example of Indi...

Example of Indirect Taxes and Subsidies- ACCOUNTING SYSTEM   We now permit our government to impose what are called indirect taxes. This category includes sales tax, excise tax,

Determine the net terminal year cash flow, A company is assessing a propose...

A company is assessing a proposed 4-year project.  The depreciable cost will involve the following: $300,000 for the equipment, $20,000 for shipping, and $30,000 for installation.

List of major emerging-market economies, List of major emerging-market econ...

List of major emerging-market economies To determine if the UK is to benefit from growth of emerging-market economies in the future, it should start exporting goods and specif

Calculate the value of a maximum flow, The following network N has sourc...

The following network N has source S and sink T with arc capacities as shown. (a) Use the maximum flow algorithm to find a maximum flow from S to T and draw a diagram

What is purchasing power, What is Purchasing power One problem in usin...

What is Purchasing power One problem in using exchange rate when comparing GDP per capita between countries is that is fluctuates quite a lot. A way of avoiding dependence on

Explain why quantitative measures, Suppose a company is considering two inv...

Suppose a company is considering two investment projects. Both projects require an upfront expenditure of $30 million. The company estimates that the cost of capital is 10% and tha

Seafood restaurant in a beach resort town, A seafood restaurant in a beach ...

A seafood restaurant in a beach resort town has a fixed (unavoidable) cost of $1,000 per month and variable (avoidable) costs of another $1,000 per month. Its total revenues over t

Market index for small cap stocks, The Russell 2000 is a market index for s...

The Russell 2000 is a market index for small cap stocks - What do these changes in P/E ratios over last year tell you about current valuation in small caps and the different market

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd