2.2.3 Long Run of Aggregated Supply Flashcards
What is long-run aggregate supply
the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability and quality of factor inputs.
What is LRAS independent of
Therefore an outward shift in the LRAS curve would be due to
This is independent of the price level in the economy.
An outwards shift of the LRAS curve represents an increase in potential GDP / potential output / potential employment.
Changes in national potential GDP/LRAS are due to 6 things, being?
- labour supply and producutivity (i.e. more people joining the labour force including migration, and their levels of education and training )
- stock of capital inputs – affected by the level of gross capital investment
- efficiency of inputs e.g. shifting resources from rural to urban areas
- quality of factor inputs/productivity of inputs
- Advances in technology
- Improvements in institutions e.g. banking system
- Governance and regulations
- Competion policiy
The Neoclassical view of LRAS is
perfectly inelastic LRAS curve
How would a classical view of LRAS be shown a graph
And hence, how would an expansion in LRAS be shown
Rightward shift represents an increase in the economy’s productive potential/capacity
Using two separate AS curves is an approach taken by, what type of economists
Neoclassical economists
How can u show LRAS and SRAS on a graph together as two separate lines
What would cause a shift in SARS and LRAS
SARA if costs of production change
LRAS quantity and/or quality of factors of production change
What does productivity measure
the efficiency of the production process
In the long run, productivity is a major determiner of what
economic growth and/or inflation
What can productivity be measured by
- Output per worker employed
- Output per person hour
- Value added for each extra factor of production
What do you add together to work out national output
Factor inputs (land, labour, capital)
+
Factor productivity
What does increased productivity do to inflation
Lower inflation
Lower unit costs, outward (expansion) of short-run aggregate supply, if productivity rises faster than wages
What does increase productivity do to economic growth (real GDP)
Increase economic growth (GDP)
gains in AS and expansion of aggregate demand
What does increase productivity do to unemployment
Lower unemployment in long run
as real GDP growth rises
What does increased productivity do to balance of trade
Improve balance of trade
More competitive exports (being an injection)
What will increased productivity do to spare capacity
Rise in extra capacity in short-run
We can get more from exiting factors of production
What can increased productivity do to business investment
Higher business investment
Increased business profits
Factor that increases the propensity to invest
What will increased productivity do to Gov fiscal balance
Help Gov to reduce state spending
Increase value for money
What can Migration do to LRAS
depend on human capital of migrant workers and how long they stay
Expect positive net inward migration to shift LRAS outward (expansion)
What are the main aims of a competition policy
to promote competition between firms (which should bring prices down for consumers and encourage innovation) and improve the efficiency of markets
How can Technology effect LRAS
technology usually provides more capital, but it can also make existing factors of production more efficient or stimulate the growth of brand-new industries.
Throughout history, there have been many significant technological advances that ultimately affected long-
run growth rates
What are concerns over automation
Increasing use of robots and machines to replace humans will certainly increase productivity, but there have been worries about job loss, especially amongst low-skilled workers
How can education affect LRAS
What can be a problem with this
A highly trained / highly skilled labour force should increase an economy’s LRAS because each worker is capable of producing more output; higher human capital raises productive capacity.
In some developing countries, however,
highly skilled workers might decide to emigrate to other countries where they can receive higher pay – this is known as a ‘brain drain’.
What are keynesian aggregate supply curves are dependent on
on part the amount of spare productive capacity at different stage of the economic cycle
The Aggregate supply curves becomes inelastic as a countries reaches capacity limits
When spare capacity is high, Aggregate supply will be
elastic
Output can be increased without a significant change in general price level - no inflation
When AD1 rises to AD1
Why when the elasticity of the AS curve falls, output decreases
- The amount of spare capacity declines
- Possibility of diminishing return in production
- Resources shortage as economy approaches full employment
- Shift from AD3 to AD4 and Y4 is full capacity of the economy
When AS is perfectly inelastic (LRAS) the economy’s capacity is what
How is the only other way to increase LRAS at this point
at full capacity
therefore increase in AD is purely inflationary in short run, with little increase in output
If the AS curve will shift to the right
What is non-inflationary growth, and how would it be shown on a combined AS curve
A shift from AD1 to AD1, where there is no increase in the general price level
How would a shift be shown on the combinded LRAS curve
Increase in output without an increase in the general price level (inflation)
