4.2.2.6 determinants of long-run aggregate supply Flashcards
what are the determinants of LRAS?
- technology
- productivity
- factor mobility
- enterprise
- economic incentives and attitudes
- the institutional structure of the economy
its assumed that the LRAS curve is vertical - what does this suggest?
- that output is fixed at each level
- all factors of production in the economy are fully employed in the long run
- the normal maximum capacity of real output in an economy
what is the importance of the institutional structure of the economy in determining aggregate supply?
-> legal systems in place
-> ↑LRAS if measures taken to make it easier for businesses to start up / comply w laws / sort out their financial affairs
-> how effective financial sector is in moving funds from savers to borrowers
-> the role of banking system in providing business investment funds
-> determines availability of business funds for investment
-> can add to productive capacity of economy
what is the Keynesian AS curve?
- an alternative version of the AS curve
- based on the assumptions of those who believe that the macroeconomy works as described originally by the British economist John Maynard Keynes
there are three parts to the Keynesian AS curve
what are these?
1) at low levels of GDP (where unemployment is assumed to be high)
- it’s relatively easy for firms to find workers and to utilise idle machinery and capacity
- output can be increased without there being any upward pressure on wages
- therefore, the AS curve is relatively elastic here
2) closer to max output level for real GDP
- becomes more difficult to find workers to employ and to find spare capacity
- some upward pressure on wages and prices
- therefore, the AS curve will start to curve upwards as factors of production become scarce
3) eventually the Keynesian AS curve becomes perfectly inelastic
- ie. vertical
- as we reach full employment level of real GDP
- reached maximum potential level
how does technology affect LRAS?
->↑technology ↑ the amount firms can produce with the same resources available
-> ↑capacity of the economy
how does productivity affect LRAS?
-> ↑productivity = workers are more skilled
-> ↑produced in same amount of time
-> ↑capacity of economy
how does factor mobility affect LRAS?
-> how willing workers are to relocate for jobs and how able they are to retrain themselves to take new jobs up
-> ↑factor mobility = economy can produce more output
how does enterprise affect LRAS?
-> encouraging more youngsters to set up their own businesses
-> will ↑capacity
how do economic incentives and attitudes affect LRAS?
-> can affect how willing ppl are to work and for how long
how do changes in gov regulations affect LRAS?
- gov regulation can limit how productive and efficient a firm can be if it’s excessive
how do changes in eduction and skills affect LRAS?
- this improves quality of human capital, so it’s more productive and more able to produce a wider variety of goods and services
how does competition policy affect LRAS?
a more competitive market encourages firms to be efficient and more productive, so they’re not competed out of business
