Long-run Aggregate Supply (LRAS)
There are two differing variants of the long-run AS curve – the Keynesian LRAS curve and the classical LRAS curve:
Keynesian
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Classical
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There are 6 main factors influencing long-run AS:
- Keynesian view: At low RNO, AS is completely elastic, meaning there is spare capacity in the economy, therefore suggesting that output can increase without raising the price level. E.g. if unemployment is high, firms can employ more workers, without offering higher wages, in order to increase output. The curve slopes upwards as the economy experiences supply bottlenecks which cause cost rises (i.e. shortages of FoP). At full capacity, the curve becomes vertical – AS becomes completely inelastic as it cannot increase any further.
- Classical view: In the long-run, all resources will be used efficiently as the market clears, leading for full employment. Here, output is fixed as the idea of sticky wages is dismissed.
There are 6 main factors influencing long-run AS:
- Technological advancements – as more money is spent on improving technology for production and distribution of goods, goods in an economy can be produced in larger quantities, raising LRAS.
- Changes in relative productivity – if a labour force becomes more productive in the production process, then output will rise, hence so will LRAS.
- Changes in education and skills – if employees of a firm have a greater knowledge of their field of work they will be more productive and will be able to produce goods at the highest of qualities, so LRAS will rise.
- Changes in government regulations – if the government were to regulate the amount of carbon emissions from certain industries, then there could be a large decline in output, which would see a fall in LRAS.
- Demographic changes and migration – an inward flow of migrants who possess working skills would see a substantial rise in the size of labour forces. This would allow extended output for firms, which would boost the economy’s output and raise LRAS.
- Competition Policy – The government can implement certain policies to ensure that monopolies do not form in a market. This will help smaller businesses stay alive, and will raise competition between firms, increasing productivity and output, therefore LRAS too.
