A) The AS curve
Aggregate supply – The total supply of goods/services produced within an economy at a given price level at a given time.
The reason why the AS curve is upwards sloping can be explained in either two ways. The first one is due to the fact that the microeconomic supply curves for firms are always upwards sloping. Therefore, as the macroeconomic aggregate supply curve represents the supply of all goods/services produced by individual firms within an economy, the aggregate supply curve is upwards sloping also. The second explanation stems from the fact that firms will need to increase their short term costs in order to increase their short term output. For example, they may have to pay for staff to work overtime, as they are unlikely to be able to hire more workers as at least one of the factors of production is fixed in the short term. These short term costs will then be passed onto the consumer through higher prices which explains the positive correlation between output and price. Although, these are the two explanations that the Edexcel content guidance specifies, there are many other explanations for the upwards sloping AS curve, the main two being the sticky wage model and the sticky price model.
B) The distinction between a movement along, and a shift of, the AS curve
Shifts in aggregate supply are caused by changes in the conditions of the supply in the macro-economy (changes in the costs of production for firms). For example, an increase in the value of the pound will cause the supply of raw materials into the country to increase in price thus, increasing the costs of production for firms. This is in contrast to movements in Aggregate supply which are caused by shifts in aggregate demand. As AD shifts, a movement along the aggregate supply curve is needed in order for a state of equilibrium to be achieved.
C) The relationship between short-run AS and long-run AS
Shifts in short run AS show the effects of changes in the costs of production on the economy in the short run. However, long run AS deals with the long term impact on the productive capacity of the economy (any increase in the quantity or quality of the factors of production will cause an increase in LRAS). For example, an increase in government spending on education would cause an increase in the LRAS of the economy. This is because in the future, the increase in spending on education will be seen through an increase in the quality of the workforce (once the children benefiting from the increased educational spending get older and join the workforce). An increase in the quality of the workforce means that the overall workforce becomes more efficient and therefore can produce more goods/services. Therefore, this increases the maximum quantity of goods/services that can be produced with the economy, thus shifting the PPF curve outwards. In the short run at least one of the factors of production is fixed, whereas in the long run all factors of production are variable. Both short run and long run AS will be covered in more detail in topics 2.3.2 and 2.3.3.