Question

2. Explain what happens to cause SAS to shift. Explain the relationship of productivity and input prices when shifting SAS. Create an example of a shift in SAS and demonstrate it on a graph.

3. Explain what causes LAS to shift. Create an example and demonstrate on a graph.

Answer 1

2)A short run aggregate supply curve can shift due to the following reasons.

*Increase or decrease in wages ( Decline in wages will shift the curve to right and increase to left)

* Changes in capital stock .( Increase in capital stock will shift the supply curve to right and decrease to left)

* Technological changes ( Advancement in technology will shift the curve to right)

> changes in input prices is important factor that results in shift in short run supply curve .

When short run supply curve shifts to right, lt shows an Increase in aggregate supply due to a decrease in input prices .on the other hand if there is an increase in input prices , short run aggregate supply curve will shift to left.

Lets look at an example, Initial short run aggregate supply curve is SAS . Suppose the input prices fall,, SAS curve will shift from SAS to SAS1.

Now let's look at the impact of such a shift. New intersection SAS1 curve with aggregate demand curve leads to an increase in output and reduction in prices

3 ) position of the long run aggregate supply curve shows the quantity of goods and services predicted by classical economic theory.

Long run aggregate supply curve may shift as a result of any change in the economy that alters the natural level of output .

* Shifts arising from labour

If an economy experiences an increase in immigration from abroad, long run aggregate supply curve will shift to the right.Any change in the natural rate of unemployment will shift the LRAS curve.

Shifts arising from Capital

An increase in the econmy's Capital stock increases the productivity, there by , quantity of goods and services supplied. As a result, LRAS curve shifts to right.conversely a decrease in capital stock will shift it to left.

Shift arising from natural resources.

An economy's production depends on its natural resources, including land , minerals and weather. A discovery of a new mineral shifs LRAS to right and a change in weather pattern that makes farming difficult shifts it to left.

Now let's look at an example. Initial long run aggregate supply curve is LRAS * . When there is an increase in Capital stock it shifts to right to LRAS 1 .

The intersection of LRAS1 with AD increases output from Y* to Y1 and prices decline from P to P1