Shifts of the Long-Run Aggregate Supply

What factors shift the LRAS?

The following factors will shift the entire Classical LRAS curve, or the Keynesian AS curve outwards, thus increasing the potential output of the economy. This corresponds to an outward or inward shift on the PPC for an economy

• Changes in the quality or quantity of the factors of production

• Technological advances

• Efficiency improvements

• Changes in institutions

How do changes in the quality or quantity of the factors of production shift the LRAS curve?

• Any factor that increases the quality or quantity of a FOP will increase the productive potential of an economy

• E.g. improving the skills of workers or changing the migration policies so that there is an increase the quantity of labour

How do technological advances shift the LRAS curve?

• These often improve the FOPs

• E.g. development of metal alloys

How do efficiency improvements shift the LRAS curve?

• Process innovation often results in productivity improvement

• E.g. moving from labour intensive car production to automated car production

How do changes in institution shift the LRAS curve?

• Increasing financial institutions can result in more access to finance and help to increase the potential supply

• Creating and implementing new laws can make it easier for new firms to enter markets thus increasing supply

• E.g. implementation of competition policy

What does a change to LRAS in the classical movement look like?

What is the analysis of a change to LRAS in the classical model?

• The initial potential output of this economy is seen at Y_FE

  • The economy is in equilibrium at AP₁Y_FE

• A change to the education level in the economy can increase the quality of labour and shift the LRAS to the right from LRAS₁→LRAS₂

  • There is now an increased level of potential output in the economy at Y_FE1

• The extra supply in the economy allows prices to fall and output to increase resulting in a new equilibrium at AP₂Y_FE1

What does a change to AS in the Keynesian model look like?

What is the analysis of a change to AS in the Keynesian model?

• The initial potential output of this economy is seen at Y_FE

• A change to the immigration policy can increase the quantity of labour and shift the AS to the right from AS₁→AS₂

  • There is now an increased level of possible output in the economy Y_FE1