Long Run Aggregate Supply

Question 1

Factors Affecting LRAS

Answer 1

1. Change in quantity or quality of factors of production.
2. Technological Advances.
3. Changes in Education and Skills.
4. Changes in Relative Productivity.
5. Changes in Government /Competition Policy.
6. Demographic Changes and Migration.
7. The Institutional Structure of the Economy.

Question 2

How Technological Advances affect LRAS

Answer 2

• Reduce the cost of production and help to increase productivity.
• Leads to an increase in supply as firms already in the industry can increase production to earn higher profits.
• Other firms might enter the industry.

Question 3

How Changes in Education and Skills affect LRAS

Answer 3

• An increase in the quality of the labour force enhances productivity and therefore LRAS will increase.
• Training and education of the workforce should lead to an increase in efficiency and skills.
• A higher skilled workforce is better able to innovate and continually improve production processes.

Question 4

How Changes in Relative Productivity affect LRAS

Answer 4

• The UK lags behind its competitors in terms of productivity.

Question 5

How Changes in Government Regulations/Competition Policy affect LRAS

Answer 5

• Governments will often use regulatory frameworks to improve the level of competition in different markets.
• If successful, then greater competition can drive efficiency gains amongst firms as they strive to maximise their profits, encourages innovation provides greater choice and quality.

Question 6

How Demographic Changes and Migration affect LRAS

Answer 6

• Changes in population impact LRAS.
• For example, an ageing population has led people to live longer without working.
• An increase in the sixe of the labour force through immigration will increase productive potential.