AQA Economics A-level Macroeconomics: Determinants of LRAS PDF

AQA​ ​Economics​ ​A-level Macroeconomics Topic​ 2:​ How the Macroeconomy Works, Circular Flow of Income, AD- AS Analysis and Related Concepts 2.6 Determinants of LRAS Notes www.pmt.education It is assumed that the LRAS curve is vertical This view...

AQA​ ​Economics​ ​A-level Macroeconomics Topic​ 2:​ How the Macroeconomy Works, Circular Flow of Income, AD- AS Analysis and Related Concepts 2.6 Determinants of LRAS Notes www.pmt.education It is assumed that the LRAS curve is vertical This view suggests that output is fixed at each level. All factors of production in the economy are fully employed in the long run. This means that changing AD, such as from AD1 to AD2, only makes a change in the price level (P1 to P2), and it will not change national output (real GDP). The position of the vertical LRAS curve represents the normal capacity level of output of the economy. www.pmt.education Factors influencing the long-run AS: The LRAS curve is influenced by changes which affect the quantity or quality of the factors of production. This is equivalent to shifting the PPF curve i.e. when the economy is operating at full capacity. Technological advances: If more money is spent on improving technology, the economy can produce goods in larger volumes or improve the quality of goods and services produced. Changes in relative productivity: A more productive labour and capital input will produce a larger quantity of output with the same quantity of input. Changes in education and skills: This improves the quality of human capital, so it is more productive and more able to produce a wider variety of goods and services. Changes in government regulations: Government regulation could limit how productive and efficient a firm can be if it is excessive. This is sometimes referred to as ‘red-tape’. Demographic changes and migration: If there is net inward migration and the majority of the population is of working age, the size of the labour force is going to be significant, which means the economy can increase its output. Competition policy: A more competitive market encourages firms to be more efficient and more productive, so they are not competed out of business. Governments can use effective competition policy to stimulate this in the economy. www.pmt.education The 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; there is spare capacity in the economy. The vertical section is when resources are fully employed. Over the spare capacity section, output can be increased (AD1 to AD2) without affecting the price level (stays at P1). In other words, output changes are not inflationary. Once resources are fully employed, an increase in output (AD3 to AD4) will be inflationary (price level increases from P2 to P3). www.pmt.education