2.3.3 Long-run aggregate supply Flashcards
why is there a limit on how much supply can increase in the long run?
what is different on the LRAS than the SRAS regarding wage rates
-this is because there is a limit on the number of people and machines that are available and once labour productivity is maximised, supply cannot be increased any further.
-on the LRAS wage rates are variable and can change
what is long run aggregate supply
long run aggregate supply refers to when all factors of production are variable and can change
what are the 2 different types of LRAS
keynesian and classical
in the long run, what is AS independent of and determined by
what is the LRAS a measure of, what is it linked to in theme 1
-in the long run, AS is independent of price level and it is determined by the level of all factors of production and the quality of technology
-the LRAS is a measure of a country’s potential output, it is linked to the concept of a PPF curve.
Classical LRAS:
what is the classical curve identical to in the keynesian LRAS
who is it endorsed by
what did these group of economists think
when did other economists begin to doubt this view on LRAS, what did they move to and why.
-the classical LRAS curve is identical to the classical stage (ed stage) of the keynesian LRAS
-the classical LRAS is endorsed by neo-classical economists
-these neo-classical economists belived that the economy is always operating with its factors of production fully employed, there is no spare capacity in the economy
-after the great depression economists began to doubt the neo-classical school of thought, they began to move towards the keynesian school of thought. this is because during the great depession, the unemployment rate soared high to around 20-30%. This lead to keyenes criticising the classical LRAS as with unemployment that high it was impossible for the economy to be producing with all factors of production fully employed.
Keynesian LRAS:
what does the Keynesian LRAS show
what does inside the LRAS curve represent (similar to theme 1)
what are the three stages called
explain what happens in stage 1 and why
explain what happens in stage 2 and why
explain what happens in stage 3 and why
-the keynesian LRAS shows that increasing output has different impacts on price, depending on the level of output, this effect depends on the amount of spare capacity in an economy
-inside the LRAS is similar to the PPF curve, inside the curve represents productive inefficiency
-the three stages are calles the keynesian stage, the intermediate stage and the classicl stage.
-stage 1 is the keynesian stage, this is where unemployment is high and output is low, so it is possible for firms ot increase ouptu without increasing price level, this is because when unemployment is high, an increase in output can be achieved by employig previously unemployed workers at the going wage rate and paying the going price for raw materials and capital equipment. At this low level of output there is no competition for factors of production; there are many unemployed resources who wish to work.This sesction of AS curve is known as perfectly elastic, ultimately this occrs due to significant spare capacity in the economy
-stage 2 is the intermediate stage, as output increases, a point is reached where the increase in output is met with an increase in price level. this is because resources become more scrace, this means that producers then have to either employ less workers or machinery, or compete with other firms forthe efficient factors of prodcution. Both of these will lead to an increase in costs whch s passed onto consumers, thus an increase in the price level in the economy.
-stage 3 is the classical stage, this is where essentially a point is reached where all factors of production are fully and efficiently employed. At this point, it is not possible to increase the level of ouput any further, irrespective of an increase in price level, this is becayse the economy is at full capacity. In this section, LRAS is perfectly inelastic.
-stage 2 is the intermediate stage,
what factors lead to an increase in LRAS (Q2 CELL)
an increase in the quality/quantity of CELL (capital/enterprise/land/labour)
Quantity: Quality:
-capital: increase in net investment/ advancements in technology
-enterprise: government schemes,i.e start up grants,,gov grants. / entreeneurship and management training.
-land: deforestation (discovering new land)/ better technology.machinery to better the productivity of land (e.g tractors)
-labour: migration, population growth, higher NMW, higher retirement age / better training and education, investment in technology
