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Download 7.6 The determinants of long
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The determinants of long-run aggregate supply Starter • Identify 3 factors that shift SRAS • Identify 3 factors that shift LRAS What shifts short run aggregate supply? • Changes in labour costs • Changes to raw material costs and other components • Changes to producer taxes and subsidies levied by the government as part of their fiscal policy Inward Shift in SRAS SRAS2 Price Level SRAS1 P2 Inward shift of SRAS Less output can be supplied at each price level Y2 Y1 RNO Today's objectives • Understand the concept of LRAS • Identify the factors that shift LRAS Economy at full potential • From what we know so far, using a diagram, explain what the characteristics of the economy are at full capacity Long Run Aggregate Supply (LRAS) • LRAS is located at potential GDP – it represents a level of real national output in the economy • Potential GDP is assumed to be independent of the price level – The price level is fixed – All resources are fully employed – The economy is on its production possibilities curve Shifts in LRAS – Changes in full-employment labour supply available for production (i.e. more people join the labour force) – Changes in the stock of capital inputs – affected by the level of gross capital investment – Changes in the productivity of factor inputs e.g. higher labour productivity or an increase in capital productivity – Advances in the general state of technology – The quantities of the factors of production in an economy – The mobility of factors of production, particularly labour – Personal enterprise – People’s attitude to hard work – Appropriate economic incentives – The institutional structure of an economy (laws, banking system) Macroeconomic equilibrium General Price Level LRAS SRAS AD Yfe Real National Output Short Run (SRAS) and Long Run Aggregate Supply (LRAS) Price Level LRAS SRAS Short run GDP exceeds potential Potential GDP Yfe RO Short Run (SRAS) and Long Run Aggregate Supply (LRAS) Price Level LRAS SRAS Short run GDP exceeds potential Potential GDP Short run GDP below potential Yfe RO Short Run (SRAS) and Long Run Aggregate Supply (LRAS) Price Level LRAS SRAS Positive output gap Short run GDP exceeds potential Potential GDP Short run GDP below potential Yfe RO Short Run (SRAS) and Long Run Aggregate Supply (LRAS) LRAS Price Level SRAS Positive output gap Short run GDP exceeds potential Negative output gap Potential GDP Short run GDP below potential Yfe RNO Using a SRAS and AD diagram illustrate and explain how the following scenarios impact on AS then AD. • An increase in level of wages. • An increase in the cost of steel hint: car industry/building through UK. • Decrease in the price of imports hint: Palm Oil used in beauty products, Olive Oil from Italy used in Jamie Oliver's Restaurant. • Seasonal immigration of construction workers from Eastern Europe during Summer months Macroeconomic equilibrium General Price Level LRAS SRAS P2 P1 AD2 AD Yfe Y2 Real National Output Inter-relationships between SRAS and LRAS General Price Level LRAS SRAS P1 AD2 AD Yp Y2 Increased labour demand may cause labour shortages and Increased output may force higher the prices of essential components. Higher wage costs + Increased raw material prices + More expensive rents for commercial businesses = HIGHER INPUT COSTS Real National Output Inter-relationships between SRAS and LRAS General Price Level LRAS SRAS2 SRAS P2 higher costs cause an upward shift in SRAS P1 AD2 AD Yp Y2 Real National Output Inter-relationships between SRAS and LRAS General Price Level LRAS SRAS2 SRAS P2 This may take national output back towards the original level of output - i.e. back towards the long run equilibrium for the economy found at Yp P1 AD2 AD Yp Y2 Real National Output The Keynesian non linear aggregate supply curve A different way of showing aggregate supply The Keynesian Non-Linear Aggregate Supply Curve Price Level LRAS Yfe RO The Non-Linear Supply Curve LRAS Price Level AD2 AD Elastic supply Yfe RO The Non-Linear Supply Curve LRAS Price Level AD4 AD3 AD2 AD Elastic supply Yfe RO The Non-Linear Supply Curve LRAS Price Level AD6 AD5 AD4 AD3 AD2 AD Elastic supply Yfe RO
