CIE AS SAMPLE ESSAYS

a) Explain what is meant by aggregate supply and explain one reason why the aggregate supply curve of an economy would shift outwards in 
(i) the short run, and 
(ii) the long run. [8] 

Aggregate supply (AS) refers to the total quantity of goods and services that all firms in an economy are willing to produce at different price levels, over a given period of time. It reflects the economy’s overall production capacity.

The AS curve can be considered in two time frames. In the short run, at least one factor of production is fixed and cannot be changed. Therefore, Short-run Aggregate Supply (SRAS), is upward-sloping because it reflects the period when resource prices (like wages) are fixed, but output prices can change.

When input costs decrease, businesses find it cheaper to produce goods and services, which allows them to increase output without raising prices. For example, a decrease in oil prices can reduce transportation and energy costs for many industries, leading to higher production levels. This increase in production shifts the SRAS curve to the right, as firms are willing to supply more output at each price level.

The long run is a period in which all factors of production can be varied. Firms have enough time to adjust their capital stock, enter or exit the market, and adapt to new technology. Therefore, Long-run Aggregate Supply (LRAS), is vertical because it represents the economy’s potential output when all factors of production are fully utilized, independent of price levels.

Technological advancements make production processes more efficient, allowing the same quantity of resources to produce more output. For example, the development of automation and artificial intelligence in manufacturing can enable factories to produce more goods with the same amount of labor and capital. This increase in productivity means the economy’s potential output rises, shifting the LRAS curve to the right. The outward shift of LRAS reflects an increase in the maximum sustainable output level of the economy.