SRAS + LRAS (Classical + Keynsian)

• Aggregate supply is a complex topic area that is heavily disputed in the economics World, with Keynesian economists having their own interpretation and classical economists having their own interpretation.
• In the classical model, short-term aggregate supply is upward sloping and its position is determined by costs of production in the economy.
• If costs of production change, the short-term aggregate supply will shift.
• If there is an increase in cost of production, short-term aggregate supply will shift to the left.
• If there is a decrease in cost of production, short-term aggregate supply will shift to the right.
• In the classical model, long-term aggregate supply is represented as a vertical line at the Full Employment level of output, which is represented as yfe.
• yfe represents the maximum level of output and is the Full Employment level of output.
• Increase in investment throughout the economy can cause LRS to shift to the right.
• If factors of production are increasing and improving, then LRS can shift to the right.
• Increases in the quantity of labor can cause LRS to shift to the right due to immigration.
• Sustainable levels in economy means it is possible to deviate from that even to increase output.
• Infrastructure improvements such as new roads, airports, runways, railway lines, bridges, and transport infrastructure can cause LRS to shift to the right.
• Technology advances, research and development spending, new factory development, and machine upgrades can cause LRS to shift to the right.
• In UK, the natural rate of unemployment is 4.5.
• LRS can shift to the right due to an improvement in the quantity and quality of factors of production and productive efficiency of the economy.
• Many economists agree that we are fully employing all of our factors of production all of our resources in the economy therefore we must be at the Full Employment level of output.
• Classical economists believe that it's only one level of output which is why the long-run aggregate supply curve is vertical because according to classical economies we are always going to be there in the long run this one level of output lres reflects that output position when the economy is at their natural rate of unemployment that's when we are at the Fun employment level of output.
• Economy can produce using all factors of production at sustainable levels.
• Emigration from the economy can decrease the quantity of Labor, shifting LRS to the left.
• Keynesian economies dispute the idea of a short-run aggregate supply and the long run aggregate supply, believing that there is a point where the curve becomes vertical.
• Competition can improve productive efficiency throughout the economy, increasing lras to the right.
• War, conflict, natural disaster, pandemic, or health crisis can decrease the quantity of Labor, shifting LRS to the left.
• Hysteresis is a phenomenon caused by long-term unemployment where eventually workers become discouraged and drop out of the labor force, reducing the quantity of Labor.
• Keynesian economies argue that it's possible to increase production without there being any increase in inflationary pressure at times of deep recession due to mass unemployment of factors of production.
• As the economy recovers and moves closer to yfe, the pressure on existing factors of production increases, causing wages to rise and capital to become scarcer, increasing costs of production and inflation.
• LRS can shift to the left if there is a decrease in labor productivity or mass Capital depreciation.
• Keynesian economies dispute the shape of lers and argue that the curve is bendy due to the level of spare capacity in the economy.
• Quantity of Labor is the size of the labor force, not the unemployed becoming employed.
• New resource discoveries can increase the quantity of land, shifting NRS to the right.
• Migrants coming in of a working age can increase the quantity of Labor.
• Keynesian economies believe that the aggregate supply curve becomes vertical when the economy is fully utilizing all of its factors of production.
• Keynesian economies argue that the economy could be below Ife and that could be a long run equilibrium in the economy.
• Incentives like reducing benefits or cutting income tax can increase the quantity of Labor.