Determinants Of SRAS and LRAS

Question 1

What factors can affect short run aggregate supply ?

Answer 1

• The cost of production might change e.g. wages, tax and labour productivity. If costs increase, supply will shift inwards
• The cost of other inputs e.g. raw materials, commodity prices and the exchange rate if products are imported, products will be cheaper.
• Government regulations or interventions, such as environmental laws or green taxes and business regulations. Business regulations is sometimes called ‘red tape’
• There could be net outward migration of workers, which causes a ‘brain drain’ on the domestic economy, as skilled workers move elsewhere
• If there is a fall in business capital spending, supply will fall

Question 2

What are the determinants of long run aggregate supply ?

Answer 2

Technological advances
Changes in relative productivity
Changes in education and skills
Changes in government regulations
Demographic changes and migration
Competition policy

Question 3

How does technological advances effect LRAS

Answer 3

If more money is spent on improving technology, the economy can produce goods in larger volumes or improve the quantity of goods and services produced

Question 4

How do changes in relative productivity affect LRAS ?

Answer 4

A more productive labour and capital input will produce a larger quantity of output with the same quantity of input

Question 5

How do changes in education and skills affect LRAS ?

Answer 5

This improves the quality of human capital, so it is more productive and more able to produce a wider variety of goods and services

Question 6

How do changes in government regulations effect LRAS

Answer 6

Government regulations can limit how productive and efficient a firm can be

Question 7

How do demographic changes and migrations effect LRAS

Answer 7

If there is an net inward migration and the majority of the population is of working age, the size of the labour force is going to be significant, which means the economy can increase its output

Question 8

How does competition policy effect LRAS

Answer 8

A more competitive market encourages firms to be more efficient and more productive, so they’re not competed out of business