The Long run Aggregate supply curve [2.3.3] Flashcards
What is a demand side shock?
A demand side shock is a sudden unexpected event that dramatically increases or decreases demand for a product or service temporally.
What is a supply side shock?
A supply side shock is a unexpected event that changes the supply of a product or commodity.
What is Stagflation?
Stagflation is a condition that combines economic stagnation with soaring inflation. An inward shift of supply curve results in supply driven inflation and negative economic growth increase unemployment and stagnation in the economy.
What is the difference between Short run and Long run AS?
The short run assumes that the level of capital is fixed. (i.e can’t build a new factory) However in the short run you can increase existing factors of production e.g workers doing overtime
In the Long run AS the amount of capital can be increased so that the curve is determined by the size of the workforce, total capital, the level of education and labour productivity.
Why is the Long run AS curve straight?
The LRAS curve is vertical line showing the total output if all resources are fully employed. It represents a point on a PPC. Economy at full capacity.
An outward shift of LRAS shows a rise in the productive potential. Markets tend to correct themselves it will naturally move back to equilibrium were all resources are employed and economy producing at PPF.
What does the classical range show in ranges of AS?
At full employment price level has not impacted output. Shifts in AS curve lead to changes in price level but not output. Economy automatically adjusts to a fixed level of output if prices and wages adjust. Maximum potential output with current resources.
What does the intermediate range show in ranges of AS?
The intermediate range shows where there is a trade of between more output and higher price, causes inflation for higher growth. The economy approaches full employment, prices increase, where economy usually operates.
What does the Keynesian range show in ranges of AS?
Shows where there is lots of spare capacity in an economy there is a possibility to increase output and employment with price increases. During a recession with high unemployment where this is usually caused. Point between Keynesian and Classical employment rises less people looking for jobs.
How can the short run AS and Long run AS be connected?
The short run and long run AS curves can be connect together showing what happens to supply as employment changes.
Why will the economy not operate fully at the Keynesian range?
Unemployment will be high and the economy is not fully utilising resources, However non inflationary growth which will shift out AD can be without an increase in the price level because of short run AD because it is highly elastic. Subsidies lower taxation interest rate lower barriers to entry.
At the classical range there is fully utilising resources.
What factors influence LRAS?
Productivity: More prodcutive the economy is the more that will be produced with the given resources. Productivity depends on a range of facotrs like efficiency, skill of labour and tech. If UK is kmore productive than other countries encourages produce goods in this country increasing investment and LRAS.
Change in education and skills: A growing labour supply and a rise in the number of people in paid work. A more skilled workforce will be more employable and work quicker and efficiently within their jobs output will rise. Education could also be used to improve the occupational mobility of labour decreasing structural unemployment.
Technological advances: Including capital spending by business inward investment from overseas and public sector. More can be produced, it will speed up production more goods can be produced with same resources increasing LRAS.
Competition policy: The government can promote competition between businesses and markets forcing them to improve the quality of their goods/ lower their prices. They will have to improve their efficiency to still make profit. LRAS can be increased. Less competition can be beneficial as it encourages innovation and investment.
Migration: If net migration is high population will grow there will be more workers which will increase the LRAS. Value and importance of this depends on age and skill of immigrants.
What do economic policies and AS curve look like when there is spare capacity?
Non inflationary growth outward shift in AD but no increase in the price level short run AS is elastic
What do economic policies and AS curve look like when there is no spare capacity?
Inflationary pressure outward shift in AD causes rise in GPL AS is inelastic.
What are changes in a nations potential GDP caused by?
Greater labour supply.
More capital investment
Changes in efficiency of allocation of FOP
Advances in tech
Outward shift in LRAS signifies increase in long run potential growth leading to real economic growth.
