Long Run Aggregate Supply Flashcards
What is the difference between the factors of production in SRAS and LRAS?
Short run when at least one factor of production is fixed
Long run is when all the factors of production are variable
What is New Classical Long Run Aggregate Supply?
LRAS explains how much an economy can produce by using all factors or production at optimum capacity. All the factors become variable, there is full economic employment, the output does not depend on price level
Which view of LRAS sees the diagram as a straight line?
Monetarist/New Classical
What is the shape of the new classical LRAS curve?
The shape of the LRAS is vertical or perfectly inelastic
Why is the LRAS curve a straight line?
The quantity of goods and services that firms are willing and able to produce and sell in the long-run is not affected by changes in the price level
When is there a limit on how much firms can produce in the long run?
Labour productivity is maximised
Capital equipment is used up
Maximum use of resources
What factors cause a shift in the LRAS?
Production Costs
Technology
Availability of Resources
Business Confidence
Education and Skills
Government Regulations
Demographic Changes
Migration
Competition Policy
How do production costs affect LRAS?
An increase in production costs will lead to a decrease in aggregate supply, as firms are less willing to produce and sell goods and services at the same price level
How does technology affect LRAS?
An increase in technology will lead to an increase in aggregate supply, as firms will be able to produce more goods and service at the same price level
How does the availability of resources affect LRAS?
A decrease in the availability of resources will lead to a decrease in aggregate supply, as firms cannot produce and sell goods at the same price level
How does business confidence affect LRAS?
An increase in business confidence will lead to an increase in aggregate supply, as firms will invest more in production and expand operations
How do education and skills affect LRAS?
Improvements in education and skills of workers raises their productivity. This will lead to an increase in aggregate supply as there is a higher productive capacity
How does government regulations affect LRAS?
If the policy changes to create an environment for entrepreneurs to set up businesses, there is an increase in LRAS. Imposing regulations on businesses can reduce the suppliers in the market hence reducing productive potential
How can the government increase the workforce and decrease unemployment?
Government can increase the workforce by encouraging people to work and decrease inactivity. Unemployment can be decreased by reducing benefits and increase the working age
How does migration affect LRAS?
If there is a growth in the labour force due to migration of workers, there is an increase in aggregate supply
How does demographic changes affect LRAS?
In an ageing population or young population, the aggregate supply will be lower as the working population is smaller so less goods can be produced. The more people who are working age, the higher the output capacity, so aggregate supply increases
How does competition policy affect LRAS?
The government can promote competition between businesses and markets through competition policy to force them to improve quality and lower prices. To do this and maintain a profit, they must improve efficiency, increasing aggregate supply
What is the Keynesian view of LRAS?
Keynesian economists believe that the economy can be below full capacity in the long term and elastic
What are the 3 parts of the Keynesian LRAS diagram?
Part 1: Horizontal Segment
Output can increase without a change in price level because of large spare capacity
Part 2: Upward Sloping Segment
As output rises, firms experience shortages, so there are increased costs
Part 3: Vertical Segment
Increases in demand leads to higher price not higher output
What is an overheating economy?
An overheating economy is where there is full employment output, so any increases in demand leads to higher prices rather than increased output
What does it mean if the wages and prices are sticky?
Economies do not automatically return to full employment equilibrium
What is the key point of disagreement between Keynesian and Classical economists?
Classical economists believe wages and prices are flexible and will automatically adjust to a new equilibrium
Keynesian economists, believe wages are sticky downwards, hence workers will not accept lower paying jobs quickly
Why does a shift in Keynesian LRAS have different effects on price level and output?
If the economy is at or near full employment, increases in supply lead to a raise in output and lowering in prices
If the economy is in a depression (spare capacity) the increase will have no impact on the economy
