2.3.3 Long-run AS

• Keynesian view


  The price level in the economy is fixed until resources are fully employed
• Keynesian view of output and price level

  1. Horizontal section: Output and price level when resources are not fully employed, spare capacity in the economy

  2. Vertical section: 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)
• Once resources are fully employed

  An increase in output (AD3 to AD4) will be inflationary (price level increases from P2 to P3)
• This view suggests that output is fixed at each level
• All factors of production in the economy are fully employed in the long run
• 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)
• Factors influencing the long-run AS

  • Technological advances
  • Changes in relative productivity
  • Changes in education and skills
  • Changes in government regulations
  • Demographic changes and migration
  • Competition policy
• 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