2.3.3 Long-run AS

Question 1

Different shapes of long run AS LRAS

Answer 1

Keynesian
Classical

Question 2

Keynesian graph

Answer 2

The Keynesian view suggests that the price level in the economy is fixed until resources are fully employed. The horizontal section shows the output and price level when resources are not fully employed; there is spare capacity in the economy. The vertical section is when resources are fully employed.
Over the spare capacity section, output can be increased (AD1 to AD2) without affecting the price level (stays at P1). In other words, output changes are not inflationary.
Once resources are fully employed, an increase in output (AD3 to AD4) will be inflationary (price level increases from P2 to P3).

Question 3

Classical graph

Answer 3

This view suggests that output is fixed at each level. All factors of production in the economy are fully employed in the long run. (LRAS is a vertical line)
This means that changing AD, such as from AD1 to AD2, only makes a change in the price level (P1 to P2), and it will not change national output (real GDP).

Question 4

Factors influencing LRAS

Answer 4

The LRAS curve is influenced by changes which affect the quantity or quality of the factors of production. This is equivalent to shifting the PPF curve i.e. when the economy is operating at full capacity. An increase in the number of goods/services produced would mean that LRAS would shift outwards.
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy

Question 5

Technological advances: factors influencing LRAS

Answer 5

If more money is spent on improving technology, the economy can produce goods in larger volumes or improve the quality of goods and services produced.

Question 6

Changes in relative productivity: factors influencing LRAS

Answer 6

A more productive labour and capital input will produce a larger quantity of output with the same quantity of input.

Question 7

Changes in education and skills: factors influencing LRAS

Answer 7

This improves the quality of human capital, so it is more productive and more able to produce a wider variety of goods and services. They may become more innovative and able to contribute to technological advances.

Question 8

Changes in government regulations: factors influencing LRAS

Answer 8

Government regulation could limit how productive and efficient a firm can be if it is excessive. This is sometimes referred to as ‘red-tape’.

Question 9

Demographic changes and migration: factors influencing LRAS

Answer 9

If there is net inward migration and the majority of the population is of working age, the size of the labour force will increase, which means the economy can increase its output.

Question 10

Competition policy: factors influencing LRAS

Answer 10

A more competitive market encourages firms to be more efficient and more productive, so they are not competed out of business. Governments can use effective competition policy to stimulate efficiency in the economy.

Question 11

Synoptic point** - LRAS

Answer 11

Many of the factors which affect LRAS are microeconomic factors, for example competition policy. It is clear that microeconomic changes can have macroeconomic impacts if they are widespread enough.