Long Run Aggregate Supply

Question 1

What is the difference between the factors of production in SRAS and LRAS?

Answer 1

Short run when at least one factor of production is fixed
Long run is when all the factors of production are variable

Question 2

What is Long Run Aggregate Supply?

Answer 2

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

Question 3

Which view of LRAS sees the diagram as a straight line?

Answer 3

Monetarist/New Classical

Question 4

What is the shape of the new classical LRAS curve?

Answer 4

The shape of the LRAS is vertical or perfectly inelastic

Question 5

Why is the LRAS curve a straight line?

Answer 5

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

Question 6

When is there a limit on how much firms can produce in the long run?

Answer 6

Labour productivity is maximised
Capital equipment is used up
Maximum use of resources

Question 7

What factors cause a shift in the LRAS?

Answer 7

Production Costs
Technology
Availability of Resources
Business Confidence
Education and Skills
Government Regulations
Demographic Changes
Migration
Competition Policy

Question 8

How do production costs affect LRAS?

Answer 8

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

Question 9

How does technology affect LRAS?

Answer 9

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

Question 10

How does the availability of resources affect LRAS?

Answer 10

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

Question 11

How does business confidence affect LRAS?

Answer 11

An increase in business confidence will lead to an increase in aggregate supply, as firms will invest more in production and expand operations

Question 12

How do education and skills affect LRAS?

Answer 12

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

Question 13

How does government regulations affect LRAS?

Answer 13

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

Question 14

How can the government increase the workforce and decrease unemployment?

Answer 14

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

Question 15

How does migration affect LRAS?

Answer 15

If there is a growth in the labour force due to migration of workers, there is an increase in aggregate supply

Question 16

How does demographic changes affect LRAS?

Answer 16

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

Question 17

How does competition policy affect LRAS?

Answer 17

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

Question 18

What is the Keynesian view of LRAS?

Answer 18

Keynesian economists believe that the economy can be below full capacity in the long term and elastic

Question 19

What are the 3 parts of the Keynesian LRAS diagram?

Answer 19

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

Question 20

What is an overheating economy?

Answer 20

An overheating economy is where there is full employment output, so any increases in demand leads to higher prices rather than increased output

Question 21

What does it mean if the wages and prices are sticky?

Answer 21

Economies do not automatically return to full employment equilibrium

Question 22

What is the key point of disagreement between Keynesian and Classical economists?

Answer 22

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

Question 23

Why does a shift in Keynesian LRAS have different effects on price level and output?

Answer 23

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