2.3.3 - long-run AS Flashcards
What does long-run mean?
The prices of all FOPs may change
What does the classical LRAS curve look like?
A vertical line from the x axis
Why is the classical LRAS curve vertical?
Classical economists assume prices adjust to establish a market clearing equilibrium, so all FOPs are fully employed and the economy will be operating at full capacity. Determined by the level of all FOPs are quality of technology, shows the country’s potential output at full capacity.
What impacts the LRAS?
Quality and quantity of FOPs
What are some examples of factors that would affect the LRAS?
- technological advances
- human capital (skills and education)
- labour market participation
- net migration
- natural resources
- competition policy
- changes in relative productivity
- government regulation changes
- demographic changes and migration
What do Keynesian economists believe about LRAS?
They don’t believe that prices adjust in the long run to bring about full employment.
What is the first section of the Keynesian LRAS curve?
AS begins perfectly elastic (horizontal) at low levels of output due to significant levels of spare capacity.
What is the second section of the Keynesian LRAS curve?
As the economy verges toward full employment, AS becomes more inelastic, due to shortages of capital. Cost of production increases and prices rise to maintain profit margins.
What is the third section of the Keynesian LRAS curve?
Full employment is reached and AS is perfectly inelastic. There is no spare capacity and optimal productivity is reached.
How do technological advances influence LRAS?
improvements in technology shift LRAS right as more can be produced. Production is more efficient, more goods can be produced with these resources.
How do changes in relative productivity influence LRAS?
The more productive the economy, the more is produced with given resources. Productivity can depend on efficiency, laboUr skills, technology. If a country is more productive than others, investment will be increased as production of the good is further encouraged, increasing LRAS.
How do changes in education and skills influence LRAS?
A more skilled workforce is more employable, increasing efficiency, output per worker will increase, shifting LRAS right. Education can increase occupational mobility of labour, decreasing structural unemployment, all resources are used efficiently.
How do changes in government regulations influence LRAS?
- increased size of workforce by encouraging more people to work. benefits may be reduced, encouraging employment. working age could be changed, expanding the workforce, this increases LRAS as there are more FOPs in the economy
- government may increase R+D, offering tax breaks to businesses who invest in research, this may increase LRAS due to improved productivity
- easier to set up businesses, increased incentives to be entrepreneurial eg. lower corporation tax, increasing the number of companies, jobs an output, increasing LRAS
- high regulation limits LRAS due to increased costs and time taken to complete tasks, reducing output.
How do demographic changes and migration influence LRAS?
If immigration is higher than emigration, population will grow and there will be more workers, increasing LRAS. This depends on age and skills of immigrants. If the population is ageing or very young, LRAS is lower as the working population is smaller. The more people of working age, the higher the LRAS.
How does competition policy influence LRAS?
The government may promote competition between businesses and markets, forcing them to improve quality of goods or lower prices. Businesses will have to improve their efficiency, meaning more goods/services can be produced, increasing LRAS. However, less competition can sometimes be beneficial if investment and innovation are encouraged.
