2.3.3: Long-Run AS Flashcards
What are the different shapes of LRAS?
-Classical.
-Keynesian.
Classical LRAS graph
Keynesian LRAS graph
What is the classical LRAS graph a measure of?
A country’s potential output.
Why is the classical LRAS curve vertical?
It assumes that all factors of production are fully utilised.
Changing AD only changes the ________ ________ on the classical LRAS curve.
Price level.
What causes a shift in the classical LRAS curve?
A change in the factors of production.
Why does AD1 -> AD2 not cause a change in the price level?
Spare capacity: the economy can increase output without added costs (e.g. factories not working at full capacity improving its production rate). Highly elastic.
Why does AD3 -> AD4 cause a larger increase in price level than GDP?
When resources are fully utilised, an increase in output will be more inflationary. More inelastic (as output is close to full-capacity levels).
What are the factors influencing LRAS?
-Technological advances.
-Changes in productivity.
-Education & training.
-Market competition.
-Regulation.
How does technological advances influence LRAS?
Improvements speed up production, so more quality goods are produced over a period of time.
Outward shift.
How does change in productivity influence LRAS?
The more productive an economy is, the more that will be produced over a period of time.
Outward shift.
How does education & training influence LRAS?
A more skilled workforce will be more efficient at their jobs (increased output per worker).
Outward shift.
How does market competition influence LRAS?
Competition forces firms to improve production efficiency and quality of products.
Outward shift.
How does regulation influence LRAS?
Outwards- tax breaks to businesses that invest in R&D.
Inwards- increasing costs over time, slowing the production process.
