2.3.3- Long Run AS Flashcards
What is AS like in the long run on the classical curve?
AS is independent of the price level and is determined by the level of all factors of production and the quality of technology
Can LRAS be exceeded on the classical curve?
Yes when the factors of production are overwhelmed, but it won’t work in the long run
What does the Keynesian diagram show?
That the price level in the economy is fixed until resources are fully employed
Why does the Keynesian diagram show that wages won’t fall below a certain level?
-unions prevent wages from falling too low
-firms are unwilling to risk demotivating their staff by reducing wages
-workers are unwilling to work unless a certain wage
-minimum wage exists
What are the factors influencing LRAS?
-technological advances
-changes in relative productivity
-changes in education and skills
-changes in government regulations
-demographic changes and migration
-competition policy
How do technological advances influence LRAS?
-speeds up production so more goods can be produced
-can improve quality
How do changes in productivity influence LRAS?
-more output will be produced
-if one country is more productive than another, it will encourage production in that country so investment increases so LRAS increases
How do changes in education and skills influence LRAS?
-high skilled labour will be more efficient so output will increase
-can improve occupational mobility of labour so decreases structural unemployment
-may be more innovative and contribute to tech advances
How do changes in gov regulations influence LRAS?
-gov can increase the size of the work force by encouraging people to go to work and decreasing inactivity
-can increase research and development
-can make it easier to set up businesses and increase incentives to be entrepreneurial
-high regulation will limit LRAS as it will increase costs and time
How can the government increase the size of the workforce?
-offer free childcare to encourage stay at home mums to go to work
-can reduce benefits to decrease unemployment
-can change the working age
How can the government increase research and development?
Can offer tax breaks to firms who invest money into research
How do governments make it easier to be entrepreneurial?
Lowers corporation tax
How do demographic changes and migration influence LRAS?
-if immigration is higher than emigration, the population will grow
-the value of immigration depends on the age of immigrants and their skills
-in an ageing or young population, LRAS is lower as the working population is smaller
How does competition policy influence LRAS?
-the gov can promote competition between businesses and markets which will force them to improve the quality of their goods or lower prices so firms will have to improve their efficiency
-less competition will encourage investment + innovation
