Quantity Supplied and Price

1. What is the impact on both quantity supplied and price?

The impact on the quantity supplied would be if the demand increases, the demand curve will shift to the right causing the demand and price to also increase. If too many products are available the price should be cheaper than if the supply was lesser than the demand.

The SRAS assumes that the capital level is fixed. An example: In the short run you CAN'T build a new gas station. This being said, in the short run you CAN increase the use of existing factors of production (employees working overtime). In the short run an increase in the price of goods (gas) encourages firms to take on more workers, produce more and pay slightly higher wages. Therefore the SRAS suggests that since there is a temporary increase in output (companies employing more workers), there is an increase in prices. 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--levels of: labour productivity, size of workforce, education and size of capital stock. An increase in investment or growth in size of labour force would shift the LRAS curve to the right. SRAS shows a change in oil prices or wage costs; LRAS show long run economic growth, and an increase in capital stock and investment.

2. How does the economy adjust back to the long run if the government takes NO corrective action?

If the government doesn't step in then people would stop buying things. Prices would be adjusted to create a demand again. If something costs too much, people would boycott and petition against it.

When the economy reaches its level of full employment (when the economy is on the production possibility borderline) the aggregate supply curve becomes inflexible. Even at higher prices, firms cannot produce more in the short term.

In the short run aggregate supply can be affected by:

* Price of raw materials

* Levels of tax and subsidies

* Price of labour

In the long run aggregate supply is determined by:

* Quantity and productivity of capital

* Available land and raw materials

* The level of entrepreneurship in the economy.

* Quantity and productivity of labour

3. What would be the impact if the government does take action to get the economy back to the long run?

The demand would