Short and Long Run Aggregate Supply

Long run and Short run aggregate supply

With an appreciation of the pound the likely impacts on the economic performance of the UK economy would be as such. With a more valuable pound it would mean for firms that it would become cheaper for them to import resources and other materials required for production. This is because with an appreciation of the pound, means that in the global market that pound has more worth than before meaning you can buy more abroad with that one pound then was previously possible. This is why the resources would therefore be cheaper to import. If you’re able to import more resources then it should then mean that as an economy you would perform better as you’d be producing more at the same price and therefore meeting the demand of the economy.  Also once you’ve imported these cheaper goods it means that the cost of producing your goods will reduce, leading to a subsequent reduction in prices. And whenever there’s a decrease in price, it will be followed by an increase in demand, and therefore finding the equilibrium price. Another important point is that inflation will be affected and will be driven down. This will be because, with companies being able to produce the same goods at a cheaper price, it would mean that foreign companies would have to bring down costs to keep up with the fall in prices. This in turn would increase performance as it would allow for a general higher standard of living and more money to spend. [pic 1]

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The introduction of a high national minimum wage would most likely negatively affect the UK’s economic performance. This would be the case because, firstly if people are being paid more then, it means companies and firms may not be able to pay their employees this rate, which in turn would lead to cut in pay for those higher up in the business or that those on the minimum wage would be made redundant. The knock on effect of losing employees would be the firm would subsequently become less efficient and produce less. A second option could be, to cover the increase in costs for the firm, in order to balance the new surge in wages, could be to increase the price of the good. However, the consequent impact of this would be that, the supply may be kept steady, but the demand for it would reduce. The economy as a whole could suffer due to the introduction as some foreign countries may be deterred by high wage economies and may not look to invest, causing a decrease in exports and therefore, economic performance.

One supply side that could be viewed as potentially effective is to reduce benefits for those who are unemployed. If the government decided to reduce these benefits than those people who were out of work be have more of an incentive to go to work. If they knew that not was going to lead to a worse standard of living, then people would be more willing to therefore work. The implications of such a move would mean that companies could be more willing to employ people if these people were more willing to go to work, and with more people working it would increase the performance of the economy and therefore lead to growth and an increased output. Another positive side effect of this growth the value of labour in the economy would be that the government could be saving money that would’ve otherwise been on the benefits for those who were unemployed. This could create a positive multiplier effect, where the increase in those working means that the country is able to spend on improving infrastructure in order for those in work to end up with a higher standard of living. However, the size of the change would largely be down to how much they cut the benefits down by, because if the cut still made the opportunity cost of not working higher, then people would just continue to do that. In terms of time-scale, in the longer run things, if the government saw by cutting the value of the benefits for those not in work was having a positive effect on the economy then, they would likely reduce them further in order to get more people into work.               [pic 3]