3.2.2.6 DETERMINANTS OF LONG-RUN AGGREGATE SUPPLY

Define normal capacity level of output

The level of output at which the full production potential of the economy is being used

In the short run, what does the aggregate supply of real output depend on?

The average price level in the economy

What is the word used to explain when all other variables stay the same?

Ceteris Paribus

How does this change in the long run?

Aggregate supply is not influenced by the price level, long run supply reflects the economy's production potential

Explain where yN is?

YN goes where Y1 is n the x axis

What is yN?

Perfectly inelastic - full capacity of the economy

This can be called - natural rate of unemployment OR natural rate of output

The natural rate of unemployment = full employment (3%) - all of those wanting a job, has a job

Supply of workers = demand for labour

(Provided by workers) - (Provided by firms)

What does an outward shift of LRAS mean?

An outwards shift means the economy's productive potential has increased

Explain the factors which shift the LRAS curve outwards

• the state of technical progress - improvements means firms can produce more output with the same level of inputs

• the quantities of capital and labour - an increase in the quantity of of inputs raises the economy’s capacity

• the productivity of the factors of production - more can be produced from the same resources

• peoples attitudes hard work - increased work ethic, increases labour input - increasing output

• personal enterprise - encourages investment - increasing productive capacity

What is the difference between SRAS and LRAS?

SRAS

Shows the level of output firms are willing to supply in the short run, when at least one factor of reduction (wages) is fixed

• it is upward sloping as higher prices increase profits when costs are too slow to adjust

What is the difference between SRAS and LRAS?

LRAS

Shows the level of output the economy can produce in the long run, when all factors of production are variable

• it is vertical as output depends on productive capacity, not the price level

How does the UK's productivity compare to others?

The UK works longer hours and generates less money than other countries

The UKs productivity ranks in the bottom half of the G7 countries

In macro, is productivity a long term problem?

Long run

How can you describe productivity?

Output per worker overtime

What are 3 things that could be don't to improve productivity in the UK?

• more work place incentives such as profit related pay or output based on

• better ‘on the job’ training such as apprenticeships to ensure that staff are as efficient as possible

• refocus education to ensure that school leavers are able to meet the skills needed of the modern global economy

What does workplace incentives mean?

Commission or bonuses - encourages individuals to work harder and faster

What does the introduction of tech do? In terms of prices and output

• decreased prices and increases output

• Keynes diagram

What is the main thing that can improve productivity n the LRAS?

Technology, AI, automation

Why does tech lead to better productivity?

Workers work for less time and generate more output

Examples of countries that are very productive?

Scandinavian counties - Norway and Sweden

MCQ