2.3.3 - Long run aggregate supply Flashcards
What can AD be defined as?
Aggregate demand is the total amount of goods and services demanded in the economy at a given time and price level.
What does the classical view of LRAS suggest?
The classical view of LRAS suggests that the economy will always produce the maximum that its factor resources will allow.
What does the keynesian view of LRAS suggest?
That an economy could be in equilibrium below full employment.
Through his (John Maynard Keynes) study of The Great Depression of the 1930’s, he concluded that the LRAS curve was upward sloping, and did have a vertical section (like the classical LRAS curve), but at times an economy could settle at a level of output below full employment
How do you label a LRAS (classical) curve?
- X axis is labelled as “Real National Output”
- Y axis is labelled as “Price Level”
- On the X axis there is a “P1”, “P2” or “P3” to represent the price at that time
- On the Y axis there is a “Y” to represent full employment and all resources are being used efficiently
- LRAS as a straight line upwards
What does “Y” represent on the X axis on the LRAS curve?
It shows that there is maximum capacity of the economy to produce goods and services i.e.
there is full employment and all resources are being used efficiently.
What does a shift inwards (left) represent on a LRAS (classical)curve?
It shows a decrease of quantity or quality of the factors of production
What does a shift outwards (right) represent on the LRAS (classical) curve?
It shows an increase of quantity or quality of factors of production
What are the factors production
*remember CELL
Capital, Enterprise, Land and Labour
What do the 3 points the demand curve on a LRAS show?
*remember A, B and C
A (at the bottom of the curve) shows unused capacity. Firms can increase output without increasing costs.
B (around the middle of the curve) shows limited spare capacity. As the economy nears full employment, firms find it more difficult to attract scarce resources, so prices begin to
rise.
C (at the top of the curve) full capacity. There is full employment and all resources are used.
Name 2 factors which affect the LRAS curve
- Technological advances
- Changes in educational skills
- Changes in relative productivity
- Changes in government regulation
- Changes in competition policy
- Demographic changes and migration
What is productivity?
Output per unit of input.
How do changes in productivity affect the LRAS curve?
This can be due to a lot of reasons such as a lack of investment in capital equipment, lack in education/training or poor management in the factors of production (CELL).
Sometimes countries are more productive due to an abundance of natural resources. By investing in all of the factors of production changes in relative productivity can be made.
How do technological advances make a change in the LRAS curve?
These can reduce the cost of production and help to increase productivity. This leads to an increase in supply as firms already in the
industry can increase production to earn higher profits. Other firms might enter the industry as the new technology has made it easier and cheaper to produce goods and services, thus allowing them to be profitable.
How do you draw a LRAS (keynesian) curve
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How do you draw a LRAS (keynesian) curve
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