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The position of the Aggregate Supply Curve

As far as labour is concerned an increase in the size of the workforce will affect the position of AS. However the size of the labour force tends to change relatively slowly unless substantial international migration is occurring.
An increase in the quantity of capital will also have this effect by increasing the capacity of the economy to produce. However such an increase requires firms to have undertaken investment.

An increase in the skills that workers have will increase the amount of aggregate output that can be produced and lead to a shift in the aggregate supply curve. An increase in the efficiency of capital perhaps arising from improvements in technology would have a similar effect, enabling greater aggregate supply.

A change in the costs faced by firms may induce them to choose to supply more or less output. There are several factors that could influence costs in this way. If raw materials become more limited in supply perhaps because reserves are exhausted then the price will rise; raising firms’ costs of production. This could cause aggregate supply to shift to the left. A change in the exchange rate could have a similar effect by affecting the domestic price of imported inputs.

An increase in the regulation would force firms to spend more. These effects would tend to result in a leftward shift of the SRAS. Conversely improvements to infrastructure (e.g. improvements to the transport system) could lead to a rightward shift of SRAS.

To conclude changes include raw material costs, exchange rates, production technology, labour productivity, government regulations and a change in the price of factor inputs.

Page last updated on 20/10/13