2.3.3 Long-run AS Flashcards
What is long run aggregate supply influenced by?
Long run aggregate supply (LRAS) is influenced by a change in the productive capacity of the economy. Productive capacity is changed by changes to the quantity or quality of the factors of production.
What are the two opposing views on how LRAS works in an economy?
/The original view is called the classical view
/The insights developed by John Meynard Keynes in 1936 are called the Keynesian view
Explain the classical view?
The classical view believes that the LRAS is perfectly inelastic (vertical) at a point of full employment of all available resources. This point corresponds to the maximum possible output on a production possibilities frontier (PPF).
Explain the Keynesian view?
Keynes believed that the long-run aggregate supply curve (LRAS) was more L shaped. Supply is elastic at lower levels of output as there is a lot of spare production capacity in the economy. Struggling firms will increase output without raising prices. Supply is perfectly inelastic (vertical) at a point of full employment (YFE) of all available resources. The closer the economy gets to this point the more price inflation will occur as firms compete for scarce resources.
Factors affecting long-run AS?
/Technological advances
/Changes in relative productivity
/Changes in education and skills
/Changes in government regulation
/Demographic changes and migration
/Competition policy
Explain technological advances?
Technological advances: these often improve the quality of the factors of production e.g. development of metal alloys.
Explain changes in relative productivity?
Changes in relative productivity: process innovation often results in productivity improvement e.g. moving from labour intensive car production to automated car production.
Explain changes in education and skills?
Changes in education and skills: over time this increases the quality of labour in an economy.
Explains changes in government regulations?
Changes in government regulations: these can improve the quantity of the factors of production. e.g. deregulation of fracking (extracting oil from shale deposits) increased oil reserves.
Explain demographic changes and migration?
Demographic changes and migration: a positive net birth rate or positive net migration rate will increase the quantity of labour available.
Explain competition policy?
Competition policy: regulating industries so as to prevent monopoly power results in more firms supplying goods/services in an economy and this increases the potential output of an economy.
