LRAS Curve: Factors of Production & Productivity

• The LRAS curve is influenced by changes affecting the quantity or quality of the factors of production.
• This is equivalent to shifting the PPF curve when the economy operates at full capacity.

Technological Advances

• Improved technology allows the economy to produce goods in larger volumes.
• Improved technology allows the economy to improve the quality of goods and services produced.

Changes in Relative Productivity

• More productive labor and capital input increases output.
• The output increases with the same quantity of input.

Changes in Education and Skills

• Improved education and skills improves the quality of human capital.
• Improved education and skills makes human capital more productive, enabling the production of a wider variety of goods and services.

Changes in Government Regulations

• Government regulation that is excessive limits how productive and efficient a firm can be.
• Excessive government regulation can be termed 'red-tape'.

Demographic Changes and Migration

• A significant net inward migration increases the size of the labor force, especially if the majority of the population is of working age.
• Net inward migration means the economy can increase its output.

Competition Policy

• A more competitive market encourages firms to be more efficient and more productive.
• Governments can use effective competition policy to stimulate the economy and encourage firms to not be competed out of business.

LRAS Curve Assumption

• The LRAS curve is assumed to be vertical in many models.
• This view suggests output is fixed at each level.
• All factors of production in it are fully employed in the long run.
• Changing AD only causes a change in the price level.
• Changing AD will not change national output (real GDP).
• The position of the vertical LRAS curve represents the economy's normal capacity level of output.

Keynesian AS Curve

• The Keynesian view suggests that the price level in the economy is fixed until resources are fully employed.
• The horizontal section shows the output and price level when resources are not fully employed.
• The horizontal section highlights spare capacity in the economy.
• The vertical section is when resources are fully employed.
• Over the spare capacity section, output can be increased without affecting the price level.
• Output changes are not inflationary in the spare capacity section.
• Once resources are fully employed, an increase in output will be inflationary.

The LRAS curve is influenced by changes affecting factors of production. Technological advances, relative productivity and education/skills influence the LRAS. Government regulations also play a role in productivity and efficiency.