Aggregate supply 2.3.3

What is the Keynesian aggregate supply curve?

It is non linear where the elasticity of aggregate supply is dependent in part on the level of spare productive capacity at different stages of a nation’s economic cycle.

What parts of an economic cycle could cause a fall in elasticity of the Keynesian curve?

• The amount of spare capacity declines

• There is the possibility of diminishing returns in production

• Bottlenecks appear in the supply of key inputs including skilled labour

What does Long Run Aggregate Supply (LRAS) represent?

Represents the maximum possible output; it is like a country’s PPF.

What is labour productivity?

A measure of efficiency indicated by output per person employed or value of output per hour worked.

What is included in infrastructure?

Physical capital such as transport networks, energy, power and water supplies and telecommunications networks.

What are key factors influencing LRAS?

• Higher productivity of labour and capital

• Growing population and increased labour market participation

• Innovation and enterprise (From research and development)

• Capital investment

• Stock of natural/ environmental resources

What might cause an inward shift in the Keynesian AS curve?

• A rise in unit labour costs

• Increases in the costs of imported energy

• Higher environmental taxes

What might cause an outward shift in the Keynesian AS curve?

• A fall in world energy prices

• Stronger exchange rate leading to lower import prices

• Government subsidies to producers

How does a highly trained/ skilled labour force increase a countries LRAS?

Each worker is capable of producing more output; higher human capital raises productive capacity.

What are some recent advances in technology that impact LRAS?

• 3D metal printing

• Cloud based AI

• Blockchain

• Quantum computing

• Custom vaccines

• Nuclear fission

• Wearable tech

What are two benefits of advances in technology?

• Existing factors of production are more efficient

• Stimulate the growth of brand new industries

What are possible advantages of automation?

• Improved product quality (fewer mistakes)

• Shorter working weeks for labour

• Rising productivity

• Safer working conditions

• Lower costs for businesses, can operate 24/7 (e.g. no sick pay)