Answer to Question #245078 in Microeconomics for Ash

Question

What is the difference between the short-run aggregate supply curve and long-run aggregate supply curve. 14 marks.

Answer 1

Essentially, the SRAS assumes that the level of capital is fixed. in the short run you can increase the utilisation of existing factors of production. 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.

The Long Run Aggregate Supply curve is determined by all factors of production – size of workforce, size of capital stock, levels of education and labour productivity. If there was an increase in investment or growth in size of labour force this would shift the LRAS curve to the right.