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2.2.5 Determinants of short-run aggregate supply

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Introduce LRAS factors
Classical V Keynesian LRAS

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Flickr / Audrey
Think there's no such thing as a high-paying, low-stress job? Think again.

With help from career-information expert Laurence Shatkin, Ph.D., we combed through the Occupational Information Network (O*NET), a US Department of Labor database that compiles detailed information on hundreds of jobs, and looked at salary data on the US Bureau of Labor Statistics website to find jobs with that perfect combination of high pay and low stress - and it turns out there are plenty.

O*NET rates the " stress tolerance" for each job on a scale from zero to 100, where a lower rating signals less stress. (Note: We are not saying these jobs are "stress free" - they just tend to rate lower than other professions.)

To rate each job, O*NET looks at how frequently workers must accept criticism and deal effectively with high stress at work.

Here are 25 jobs that pay more than $70,000 a year, on average, and earned a stress tolerance rating of 70 or lower, in order from highest to lowest stress score.

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25 high-paying jobs for people who don't like stress

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Think there's no such thing as a high-paying, low-stress job? Think again. With help from career-information expert Laurence Shatkin, Ph.D., we combed through the Occupational Information Network (O*NET), a US Department of Labor database that compiles detailed information on hundreds of jobs, and looked at salary data on the US Bureau of Labor Statistics website to find jobs with that perfect combination of high pay and low stress - and it turns out there are plenty.

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A favourite question I am often asked by prospective Economics students (and their families) is 'what career can I have with an Economics qualification?' My stock answer generally revolves around the phrase 'the world's your oyster' as I would go on to explain that alongside the practical insight into how the economy and the world generally ticks, Economics students learn to critically appraise issues that are presented and develop a more analytical approach to problem solving. What career doesn't need those skills?

I don't recall, however, suggesting that an Economics student could go on and become an..... Economist. I've certainly never suggested that an Economics student can become an Economics teacher!

Well, it seems that these may be very good suggestions if you are looking for a career that is relatively well-paid whilst having low levels of stress. According to a survey conducted by the 'Business Insider' journal, being an Economist would rank in their top 25 jobs that, with the right qualifications, can achieve the ideal situation of earning well whilst having relatively little stress. The full list can be found on the Business Insider website.

Of course, this does add as a timely reminder to our students when they are considering the factors that impact on the relative elasticity of demand (and supply) of individual occupations, levels of stress have a part to play (and can be used as part of such an analysis).

For the record, the list does include 'Economics Teacher' but only at Higher Education level.

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Be an Economist (and be less stressed!) | Economics | tutor2u

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A favourite question I am often asked by prospective Economics students (and their families) is 'what career can I have with an Economics qualification?' My stock answer generally revolves around the phrase 'the world's your oyster' as I would go on to explain that alongside the practical insight into how the economy and the world generally ticks, Economics students learn to critically appraise issues that are presented and develop a more analytical approach to problem solving.

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Population Growth and UK Aggregate Supply

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​This short revision video and presentation looks at the latest data on population growth in the UK economy. The population is rising quite rapidly as a result of increasing natural growth (the birth rate minus the death rate) together with the effects of a number of years of strong net inward migration.

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A rather fascinating debate has been raging in my department office since we returned from the Christmas holidays. Surprisingly, it doesn't concern the 'big news' items such as the VAT rise or the government's austerity measures, but instead we seem to have found a bit of a theoretical conundrum.

The debate started as a result of a puzzling entry in the original AQA Unit 2 specification, which stated that candidates must have an understanding of the Keynesian LRAS curve. To our relief, this has been updated to just 'an understanding of the Keynesian AS curve', although candidates (unlike for any of the other major exam boards) must still use both the 'classical' upwards sloping SRAS and vertical LRAS, as well.

Our conundrum deepened when we started to think about representing output gaps using the AD/AS framework, and it is this part of the puzzle that we think would benefit from input from the readers of this blog.

One way of thinking about an output gap considers the fluctuations in GDP as being fluctuations around the economy's full-employment maximum potential output (as shown by the classical vertical LRAS, or the perfectly inelastic section of the Keynesian AS curve).

The classical model allows for this as, in the short run, the SRAS can reach equilibrium with AD to the right of the vertical LRAS curve, as factors of production are paid overtime to incentivise them to work beyond what they would normally be capable of doing. This would be a positive output gap, and could also be represented by a point outside the production possibility frontier. Similarly, a negative output gap would be shown as occuring when SRAS intersects with AD to the left of the vertical LRAS curve (and when the economy is operating at a point inside the production possibility frontier). There is no output gap when SRAS, LRAS and AD coincide; this point is achieved when the money markets, the goods markets and the labour market all clear. In this model, the level of output, and therefore the output gap, is driven by the level of aggregate supply.

However, when we started thinking about applying this understanding of the output gap to the Keynesian framework, we hit a snag.

With no distinction between SRAS and LRAS, and with aggregate demand being the main determinant of the level of output in this view of the economic world, it is difficult to see how we could represent the output gap as being the fluctuations in GDP around the maximum potential level of output, using the AD/AS framework. Since we cannot derive a short-run equilibrium to the right of the AS curve, it seems that we can't have a positive output gap. This result simply can't be right (and is the main focus of our department debate!).

As a result, I started some quite extensive research, and so far, have not found any satisfactory explanations in any of my advanced level textbooks or any journals. However, as a way of fudging a solution to this puzzle, I started to think about an alternative way of representing an output gap, in which I considered the fluctuations in GDP as being fluctuations around a trend. This trend level of GDP will, for most economies, be below the maximum potential level of output; this, I think, fits well with the Keyneisan view that whilst money and goods markets may clear, the labour market does not tend to as a result of sticky wages and other imperfections.

So, using the AD/AS framework, the trend level of GDP will be represented as being a point where AD meets AS, to the left of the perfectly inelastic section of the AS curve. A positive output gap, therefore, would exist when AD increases, and the equilibrium point is to the right of this trend point (conversely, the negative output gap would be caused by a fall in AD). Again, this seems to fit well with the Keynesian view that aggregate demand is the main driver of the level of output (rather than the classical perspective that aggregate supply is the more important).

These are just musings on my part, however, and I have not found anything in the literature that I've reviewed that really helps to explain away our puzzle. The debate has already spread to other economic departments around the UK following phone calls and emails from me to try and get an adequate answer to the question; it would be great if blog readers could offer their opinion and comment on the validity (or otherwise!) of my interpretation.

At the very least, it should be an interesting debate for Monday morning breaktime!

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An Aggregate Supply puzzle | tutor2u Economics

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A rather fascinating debate has been raging in my department office since we returned from the Christmas holidays. Surprisingly, it doesn't concern the 'big news' items such as the VAT rise or the government's austerity measures, but instead we seem to have found a bit of a theoretical conundrum.

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Essentially, the SRAS assumes that the level of capital is fixed. (i.e. in the short run you can't build a new factory)

However, in the short run you can increase the utilisation of existing factors of production, e.g. workers doing overtime.

In the short run, an increase in the price of goods encourages firms to take on more workers, pay slightly higher wages and produce more.

Thus the SRAS suggests an increase in prices leads to a temporary increase in output as firms employ more workers.

The short run aggregate supply is affected by costs of production. If there is an increase in raw material prices (e.g. higher oil prices), the SRAS will shift to the left. If there is an increase in wages, the SRAS will also shift to the left.

Difference between shift in SRAS and movement along SRAS

A shift in SRAS could be due to higher oil prices (left diagram)

A movement along SRAS could be due to higher AD, which leads to increase real GDP and PL.

Long run aggregate supply (LRAS)

The Long Run Aggregate Supply curve (LRAS) is determined by all factors of production - size of the workforce, size of capital stock, levels of education and labour productivity.

If there was an increase in investment or growth in the size of the labour force this would shift the LRAS curve to the right.

This is the classical view of long run aggregate supply (LRAS). It states that aggregate supply is not determined by the price level or AD, but is determined by factors of production, - land, labour, capital and labour productivity.

How to know which ones to use?

If showing a change in wage costs or oil prices, I would use a SRAS.

For showing long run economic growth, and an increase in capital stock and investment I would show a shift in LRAS.

Keynesian view of LRAS

A further complication is that there are different views of the LRAS. The Classical view is an inelastic LRAS. The Keynesian view suggests it is elastic at a point up to inelastic. In a sense, the Keynesian view is a combination of the short run aggregate supply and long run. The Keynesian LRAS shows that there is a point in the economy of spare capacity where firms can use more. There also comes a point where full capacity is reached.
Related

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Difference between SRAS and LRAS - Economics Help

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Essentially, the SRAS assumes that the level of capital is fixed. (i.e. in the short run you can't build a new factory) However, in the short run you can increase the utilisation of existing factors of production, e.g. workers doing overtime.

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why these two schools of economic thought disagree on the shape of the LRAS curve - a disagreement borne out of their differing views on the ability of labour markets to clear during recssions.

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This short revision tutorial video looks at the Keynesian aggregate supply curve.

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How the AD/AS model incorporates growth, unemployment, and inflation

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Read and learn for free about the following article: How the AD/AS model incorporates growth, unemployment, and inflation

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Read and learn for free about the following article: Shifts in aggregate demand

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Read and learn for free about the following article: Shifts in aggregate supply

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Interpreting the aggregate demand and supply

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Let's look at some examples of aggregate supply and demand interacting with each other

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Aggregate demand and aggregate supply curves

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The concepts of supply and demand can be applied to the economy as a whole.

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Short run aggregate supply | Aggregate demand and aggregate supply | Macroeconomics | Khan Academy

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Long-run aggregate supply | Aggregate demand and aggregate supply | Macroeconomics | Khan Academy

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Y1/IB 18) Aggregate Supply (Short Run and Long Run)

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AS/IB 18) Aggregate Supply (Short Run and Long Run) - An understanding of both aggregate supply in the short and long run Twitter: https://twitter.com/econplusdal Facebook: https://www.facebook.com/EconplusDal-1651992015061685/?ref=aymt_homepage_panel

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Aggregate Demand and Supply and LRAS; Macroeconomics

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Newer video for this topic- https://www.youtube.com/watch?v=l6Udc6uDX8o In this video. I explain the most important graph in most introductory macroeconomics courses- the aggregate demand model. In this video I cover aggregate demand (AD), aggregate supply (AS), and the long run aggregate supply (LRAS).

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Aggregate supply measures the volume of goods and services produced each year. AS represents the ability of an economy to deliver goods and services to meet demand

What is short run aggregate supply?
What is long run aggregate supply?

Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g. wage rates and the state of technology are held constant.
Short Run Aggregate Supply Curve
Long run aggregate supply shows total planned output when both prices and average wage rates can change - it is a measure of a country's potential output and the concept is linked to the production possibility frontier

In the long run, the LRAS curve is assumed to be vertical (i.e. it does not change when the general price level changes)

In the short run, the SRAS curve is assumed to be upward sloping (i.e. it is responsive to a change in aggregate demand reflected in a change in the general price level)

Shifts in Short Run Aggregate Supply (SRAS)
A change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, we see an expansion of SRAS; if AD falls we see a contraction of SRAS.

Shifts in the position of the short run aggregate supply curve in the price level / output space are caused by changes in the conditions of supply for different sectors of the economy:

Employment costs e.g. wages, employment taxes. Unit labour costs are also affected by the level of labour productivity

Costs of other inputs e.g. commodity prices, raw materials. The exchange rate can affect the prices of key imported products

Impact of government e.g. environmental taxes such as carbon duties & business regulations which affect the costs of production

What are the main causes of shifts in aggregate supply?
Analysis diagram of shifts in aggregate supply

The main cause of a shift in the aggregate supply curve is a change in business costs - for example:

1. Changes in unit labour costs - i.e. labour costs per unit of output

2. Changes in other production costs: For example rental costs for retailers, the price of building materials for the construction industry, a change in the price of hops used in beer making or the cost of fertilisers used in farming.

3. Commodity prices Changes to raw material costs and other components e.g. the prices of oil, natural gas, electricity copper, rubber, iron ore, aluminium and other inputs will affect a firm's costs

4. Exchange rates: Costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas

5. Government taxation and subsidies:

1. An increase in taxes to meet environmental objectives (known as green taxes) will cause higher costs and an inward shift in the SRAS curve - for example a higher price for carbon emissions

2. Lower duty on petrol and diesel would lower costs and cause an outward shift in SRAS

6. The price of imports:

1. Cheaper imports from a lower-cost country has the effect of shifting out SRAS

2. A reduction in an import tariff on imports or an increase in the size of an import quota will also boost the supply available at each price level causing an outward shift of SRAS

Long Run Aggregate Supply Keynesian Long Run Aggregate Supply Curve
Key revision point: The main driver of SRAS for the economy is the level of production costs some of which are influenced by government policy, others by world prices. Remember that the exchange rate is important for the UK because a large percentage of our components / raw materials / energy are imported.

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Aggregate supply measures the volume of goods and services produced each year. AS represents the ability of an economy to deliver goods and services to meet demand What is short run aggregate supply? What is long run aggregate supply? Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g.

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Economic and Social Costs of Unemployment

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Aggregate supply (AS) is the quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices. This topic looks at the causes of shifts in short run aggregate supply.