The Determinants of Long-Run Aggregate Supply Flashcards
What is meant by long-run aggregate supply?
In the long-run, all factors of production are variable and can be increased over time
Is the LRAS curve vertical?
Yes
What does Y represent of the X axis?
The maximum capacity of goods e.g. there is full employment capacity and all resources are being used efficiently
What are the factors affecting LRAS?
- Land- If additional land becomes available or new raw mats are discovered, LRAS will increase
- Labour- If there is an increase in the size of the labour force, then it might be expected that output will increase- Links to productivity
- Capital- An increase in the quantity, quality and productivity of capital will boost LRAS
- Entrepreneurship- Improved incentives to set up new businesses
- Government Intervention- 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 - Economic Incentives and Attitudes- Government policy can shift the position of the LRAS curve. For example incentives in taxes and benefits, as well as changes in legislation, can affect how willing people are to work in the first place and how long and how hard, they will work within their jobs
What has happened if the curve shifts left?
A decrease in the quantity and/or quality of the factors of production
What has happened if the curve shifts right?
An increase in the quantity and/or quality of factors of the production
What does the Keynesian AS diagram look like?
A straight line that curves up
What is happening a starge A on the K Diagram?
A- Unused capacity
B- Limited Spare Capacity
C- Full Capacity
What are shifts in the K AD diagram caused by?
Any change in either the quantity or quality of factors of production will shift LRAS
