2.4 Long run aggregate supply

Question 1

What does long run mean?

Answer 1

ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability and quality of factor inoutd

Question 2

When does LRAS shift?

Answer 2

change on quality and or quantity of the factors of production

Question 3

Factors effecting LRAS?

Answer 3

• land ( more land becomes available, or new resources discovered, LRAS increases)
• labour ( if increase in labour force, quality of labour force or occupational or geographical mobility, LRAS increases)
• capital ( increase in quantity, quality and productivity of capital, LRAS increases)
• entrepreneurship ( improved incentives to set up new business, or invest in development of new goods and services , increase LRAS)
• gov intervention ( greater competition, greater LRAS)

Question 4

What does productivity measure?

Answer 4

effeciency of the production process

Question 5

In the long run, productivity is a major determinant of …?

Answer 5

economic growth and inflation

Question 6

What does higher productivity allow a business to do?

Answer 6

pay higher wages and achieve increased profits at the same time

Question 7

What is the alternative LRAS curve?

Answer 7

keynesian supply curve (more realistic)

Question 8

Explain stage 1 of keynesian curve?

Answer 8

• spare capacity is high and SRAS is perfectly elastic
• firms can increase output without increasing costs. a rise in AD can be met easily by increased output (no threat of inflation)

Question 9

Explain stage two of Keynesian curve?

Answer 9

• economy nears full employment, firms find it more difficult to attract scarce resources, so prices begin to rise
• elasticity of SRAS output falls as output increases
• amount of spare capacity declines. possibility of diminishing returns to production

Question 10

Explain stage three of keynesian curve?

Answer 10

• AS becomes vertical, economy has reached full-employment of factor resoruces. SRAS becomes perfectly inelastic
• further increases in AD are purely inflationary

Question 11

When can a countries LRAS fall?

Answer 11

• natural disastor
• destruction (loss of factor inputs caused by civil war )
• large scale net outward labour migration
• trend decline in productivity perhaps caused by persistant recession