2.3.3 Long Run Aggregate Supply Flashcards
Shape of the long run AS curve (pic)
it is perfectly inelastic
What do classical economists believe about the AS curve?
- in the long run, all markets will clear, so there can be no output gap
- instead the economy will always return to producing at its maximum potential level of output
What do Keynesian economists believe about the long run AS curve?
- it is possible to have a long run equilibrium where markets do not clear and so there can be spare capacity in an economy
Keynesian long run AS curve (pic)
shows that when there is lots of spare capacity in the economy, it is possible to increase the level of real output with no resulting increase in the average price level
- as spare capacity begins to be used up = increase in real national output = the increase costs of the factors of production = increase price level rises with output - soon the economy will reach full employment, where output cannot be increased since all factors of production are being utilised
Classical long run AS curve graph
Factors influencing long run AS
- technological advances
- changes in productivity relative to competing economies
- changes in education and skill
- changes in government regulation
- demographic or migration changes
- competition policy (-enterprise & risk taking)
- factor mobility
- economic incentives
- institutional structure of the economy
How does the factors influence long run AS?
- long run AS will be affected by factors that change the quantity or quality of the factors of the production
- capacity of the economy and shift out the PPF
How would changes in education affect long run AS?
- improved education will (in time) they increase the quality of labour in the economy and increase LRAS
How would an increase in immigratioin affect LRAS?
increase immigration would increase the quantity (ignoring any effects on the average quality) of labour in the economy leading to increase LRAS
