2.3.3 Long run AS

• Define LRAS

  Long-run aggregate supply (AS) reflects the total output an economy can produce when all resources are fully employed
• The Classical LRAS View

  -The classical view believes that the LRAS is perfectly inelastic (vertical) at a point of full employment of all available resources

  
  

  -The classical view believes that in the long-run an economy will always return to this full employment level of output
• The Keynesian LRAS View

  -Keynes believed that the long-run aggregate supply curve (LRAS) was more L shaped

  
  

  -The Keynesian view believes that an economy will not always self-correct and return to the full employment level of output
• The Keynesian LRAS View (2)

  -The Keynesian view believes that there is role for the government to increase its expenditure so as to shift aggregate demand and change the negative 'animal spirits' in the economy
• Factors affecting LRAS

  Technological advances:

  
  

  These often improve the quality of the factors of production e.g. development of metal alloys

  
  

  Changes in relative productivity:

  
  

  Process innovation often results in productivity improvement e.g. moving from labour intensive car production to automated car production
• Factors affecting LRAS (2)

  Changes in education and skills:

  
  

  Over time this increases the quality of labour in an economy

  
  

  Changes in government regulations:

  
  

  These can improve the quantity of the factors of production. e.g. deregulation of fracking (extracting oil from shale deposits) increased oil reserves
• Factors affecting LRAS (3)

  Demographic changes and migration:

  
  

  A positive net birth rate or positive net migration rate will increase the quantity of labour available

  
  

  Competition policy:

  
  

  Regulating industries so as to prevent monopoly power results in more firms supplying goods/services in an economy and this increases the potential output of an economy