2.3.3 - Long-run AS Flashcards
What are the different shapes of the long-run AS curve ?
o Keynesian - developed by John Meynard Keynes in 1936 are called the Keynesian view.
o Classical - The original view
The Classical LRAS View
In the classical model wages are fixed in the short run and the long run is determined by wages being variable.
● The classical view believes that the LRAS is perfectly inelastic (vertical) at a point of full employment of all available resources
o This point corresponds to the maximum possible output on a production possibilities frontier (PPF)
● The classical view believes that in the long-run an economy will always return to this full employment level of output.
The Keynesian LRAS View
● Keynesian argued that the classical theory of wages being variable in the long run was an unrealistic assumption and that it was possible to have a long-run equilibrium where markets don’t clear.
● The Keynesian view believes that an economy will not always self-correct and return to the full employment level of output (YFE)
o It can get stuck at an equilibrium well below the full employment level of output e.g. Great Depression
● The Keynesian view believes that there is role for the government to increase its expenditure so as to shift aggregate demand and change the negative ‘animal spirits’ in the economy
What are the factors influencing long-run AS ?
o technological advances
o changes in relative productivity
o changes in education and skills
o changes in government regulations
o demographic changes and migration
o competition policy
Technological advances
● Improvements in technology shift the LAS curve to the right This is because it will speed up
production, so more goods can be produced with the within a set time period - this affects the Quantity of supply and could also affect the Quality of supply as Technoogical advancmemts will ensure that each good is made to the **same standard/quality
Changes in relative productivity
● The more productive the economy is, the more that will be produced with the given resources Productivity depends on a range of factors, such as efficiency, skill of labour and technology.
● Additionally, if the UK is more productive than other countries it will encourage production of that good in the UK, so investment will be increased, and this will increase LRAS.
Changes in education and skills
● A highly skilled workforce will be more employable and work quicker and more efficiently within their jobs, so the output per worker will increase, which will shift the LRAS to the right.
● Education could also be used to improve the occupational mobility of labour which decreases structural unemployment as people are able to switch to new jobs easier. This will ensure all resources are used efficiently.
Changes in government regulations
● Government regulations are able to impact LRAS through a number of different way:
They can increase the size of the workforce. One way they can do this is by encouraging people to go back to work and decreasing the level of inactivity.
Stay at home mums can be enticed back to work by free childcare at
pre-school.
Unemployment can be decreased by reducing benefits, which will
encourage those living off benefits to find a job.
Moreover, they can change
the working age which will expand the workforce as more people are able towork. Increasing the quantity workforce will shift RLAS as it increases the productive capaciity of the economy and so more can be produced.
Demographic changes and migration
● If immigration is higher than emigration,
the population will grow, this increases the quantiy of the work fprce which will increaase the productive cappacity of it.
The value and importance of this immigration will depend on the
age of the immigrants and their skills. In an aging population or a young population, LRAS will be lower as the working population is smaller so therefore less goods can be produced. The more people who are of working age, the higher the LRAS.
Competition policy
The government can promote competition between businesses and markets which will force them to improve the quality of their goods or
lower prices. In order for businesses to do this and still make a profit, they have to
improve their efficiency and this efficiency will mean that more goods and services can be produced, so LRAS will increase.
However, less competition can sometimes
be beneficial if it encourages investment and innovation. For example, copyright laws
mean that businesses’ new Ideas can’t be copied which will encourage them to do more research as they know they will be the ones who benefit in terms of higher
profits.
