2.3.3 Long Run Aggregate Supply

Question 1

define LRAS

Answer 1

the maximum output when all factors of production are fully and efficiently engaged

Question 2

what are the two views of LRAS

Answer 2

• classical
• keynesian

Question 3

describe the classical view of LRAS

Answer 3

suggests that the economy will always produce the maximum that its factor resources will allow
- markets will always function efficiently over the long run

Question 4

how does the classical view believe the economy will deal with unemployed resources

Answer 4

if there are any unemployed resources, the prices of these factors will fall until the surplus disappears, as long as there is no government intervention

Question 5

describe the LRAS curve

Answer 5

an economy will produce on the outer boundary of its production possibility curve, thus the LRAS curve is vertical, marking a maximum limit of production (perfectly inelastic)

Question 6

what causes a shift in the LRAS curve

Answer 6

any change in the quality or quantity of the factors of production

Question 7

what is the Keynesian view of LRAS

Answer 7

an economy could be in equilibrium below full employment, and unemployed resources such as labour will not find work if an economy is left to its own devices, so government intervention is needed

Question 8

explain the perfectly elastic portion of the keynesian LRAS curve

Answer 8

when an economy has a high level of spare capacity, aggregate supply is drawn as perfectly elastic. this means that a rise in aggregate demand can be met easily be increased output and there is little threat of rising prices

Question 9

explain the curved portion of the keynesian LRAS curve

Answer 9

elasticity of aggregate supply is starting to drop as the economy starts to head towards productive capacity which reduces spare capacity and leads to rising costs for firms. less supply of key inputs so higher costs and thus higher prices

Question 10

explain the perfectly inelastic portion of the keynesian LRAS curve

Answer 10

no more spare capacity, all resources are now being fully utilised. this means that any further increases in AD are purely inflationary in the short run with little extra real output

Question 11

what are the factors affecting LRAS (shifts)

Answer 11

• technological advances
• changes in education and skills
• changes in productivity
• changes in government regulations
• demographic changes and migration
• competition policy

Question 12

explain how technological advances affect LRAS

Answer 12

• improves quality of capital which can reduce cost of production and help to increase productivity
• 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, thus allowing them to be more profitable

Question 13

explain how changes in education and skills affect LRAS

Answer 13

• increases quality of labour force, so productivity is enhanced and LRAS will increase
• should lead to an increase in efficiency and skills
• a higher skilled workforce is better able to innovate and continually improve production processes - shift right

Question 14

explain how changes in productivity affect LRAS

Answer 14

more productive leads to an outward shift

Question 15

define productivity

Answer 15

a measure of the degree of efficiency in the use of the factors of production in the production process. measured in terms of output per unit input

Question 16

describe the UKs productivity

Answer 16

lags behind its neighbours. poor productivity comes from a lack of investment in quality capital equipment and infrastructure, poor education and training and poor management of factors of production

Question 17

explain how changes in government regulations affect LRAS

Answer 17

governments will use regulations to improve the level of competition in different markets, which can then drive efficiency amongst firms as they strive to maximise profits

Question 18

explain how demographic changes and migration affect LRAS

Answer 18

• affects quantity of labour
• an ageing population may lead to lower output as less workers
• if there is an increase in the size of the labour force through immigration then it might be expected that output will increase

Question 19

explain how competition policy affect LRAS

Answer 19

eg CMA
increased competition will lead to greater innovation amongst firms, helping to drive down costs which will help LRAS to shift right

Question 20

summarise LRAS

Answer 20

all factors of production are variable and can be increased over time