Macro 5 - Short Run and Long Run Analysis Flashcards
What are the fundamental determinants of long-run AS?
- Technology
- Productivity
- Attitudes
- Enterprise
- Factor Mobility
- Economic Incentives
Long-run Aggregate Supply - definition
> The total quantity of goods and services all producers in an economy are willing and able to produce at a range of price levels over a given period of time, when considered in long-run.
That is, when costs don’t affect supply and when the quantity of factors of production available could potentially change.
Capacity - definition
> The total amount of goods and services an economy could potentially produce in a given time period, when all factors of production are being used efficiently and the economy is operating at full employment.
SRAS classical model
> As the price level increase, output increases.
>If SRAS is price inelastic, the curve will be steeper.
Shifts to SRAS curve classical
> Changes in costs of production causes the SRAS curve to shift.
Decrease in costs of production = at the same price level, more output can be produced = shifts right.
Shift causers: wage rates, taxes firms pay, exchange rates and efficiency levels.
LRAS classical model
> In the long-run, it’s assumed the economy moves towards equilibrium where all resources are used to full capacity.
Economy is running at its full productive potential, therefore, change in price level doesn’t affect output.
Shifts to LRAS classical model
> Changes in factors of production cause LRAS to shift - an improvement in factors of production = increased capacity = right shift = economic growth.
Examples:
1. Increased investment = advances in technology = more efficient production = increased max output.
2. Improvement in education and skills = increased productivity = increased max output.
3. Demographic changes - skilled migrants.
4. Supply of new raw materials.
5. Improvements in health care = less time off + retire at older age = increases productivity + size of labour force.
6. Change in government regulation.
7. Increased competition = inefficient firms replaced by more efficient ones.
8. Increased factor mobility e.g. decreases in occupational labour immobility through training schemes.
9. Promoting enterprise.
Keynesian LRAS curve
> Keynesian economists don’t believe that the LRAS curve is vertical.
At low-levels of output, AS is completely elastic so there’s spare capacity so output can increase without increasing price level.
E.g lots of unemployment means firms employ more workers and output increases without increasing price levels.
When curve slopes upwards it shows that the economy is experiencing problems with supply, which are causing increases in costs.
E.g. shortage of labour or resources.
Vertical when at full capacity = AS is completely inelastic. Output can’t increase.
Macroeconomic equilibrium
AS = AD.
SRAS and shifts in AD.
> An increase in AD alone can only increase output in the short-run.
Increase in output = increase in derived demand = increase in jobs = decrease in unemployment.
Also there’s a rise in price level known as ‘demand-pull’ inflation.
LRAS classical and shifts in AD.
> AD shift means output doesn’t increase only the price level - ‘demand pull’ inflation.
In general, to improve all 4 macroeconomic policy indicators at same time, there needs to be a shift in LRAS. (Keynesians only agree with this sometimes).
Shifts in AS
> Shifts in AS will either improve or worsen all 4 macroeconomic indicators (economic growth, unemployment, inflation, BoP) at the same time.
SRAS shift and AD
> Shift right = increased capacity of economy = increased output = increased economic growth = increased jobs = price level falls = increased competitiveness = improved BoP.
LRAS classical shift and AD
> Shift right = increased output = price level falls = improved BoP.
Plus economy remains at full employment.
Keynesian LRAS and shift in AD
> When AS is vertical a shift in AD along the vertical only increases price level.
When AS is horizontal a shift of AD along horizontal only increases output, PL remains the same.
If AD shifts from curve to vertical then economy was operating just under full capacity and leads to an increase in output and PL.
