2.2.6 Determinants of long-run aggregate supply 2016

Determinants of long-run aggregate supply

Factors that determine the long-run aggregate supply, including technology, productivity, attitudes, enterprise, factor mobility, and economic incentives.

Long-run aggregate supply (LRAS)

Represents the maximum possible output an economy can produce as determined by its available land, labor, capital and entrepreneurial resources.

Classical LRAS curve

A vertical curve indicating that the economy produces at maximum capacity with full employment and efficient use of resources.

Factor mobility

The ease with which factors of production can be allocated to different uses.

Economic incentives

Factors that motivate economic agents to alter their production or consumption habits.

Keynesian LRAS curve

An upward-sloping curve suggesting that the economy can operate below full employment and can shift with changes in factors of production.

Shifts of the LRAS curve

Changes in the quantity and/or quality of factors of production can cause the LRAS to shift to the right or left.

Full capacity

A situation where there is full employment and all resources are utilized efficiently.