Long Run Aggregate Supply

Long Run Aggregate Supply

1. Vertical curve

   • Does not change when PL changes
   • Max level of physical output
   • Inelastic (neo-classical)
     • Full-Employment level of national Y reached
     • No unused labour
     • Real GDP returns to level which all available labour resources are employed

2. Ability to meet D based on state of production tech and availability and quality of factor inputs

   • Total planned output - prices & average wage rates can change
   • Measure of potential output - linked to PPF
   • Y*t = f (Lt, Kt, Mt)
     • Y*: Aggregate measure of pot. output. . . . . t: time period under consideration. . . . . . . L: Quantity and availability of labour input. K: available capital stock. . . . . . . . . . . . . . . M: Availability of nat resources & materials

3. Trend growth

   • Estimated rate of growth of nation's productive pot.
   • Productivity growth => growth of output
     • Main measure of productivity growth = output per person per hour

4. Factors that shift

   • Quantity, Quality, Organisation of FoPs
   • Expanding Labour Supply
     • Gov policies, incentives, ↑ migrant labour
   • ↑ labour and capital productivity
     • I in training & quality of management
   • ∆ economy that alters trend growth shifts LRAS (∆ in productive potential)
     • Shift out = ↑ volume of output
   • ↑ occupational & geographical mobility of labour
     • ↓ structural unemployment (occupational immobility of labour)
       • ↑ supply of labour
   • ↑ capital investment
     • ↑ capital I and research
   • ↑ business efficiency
     • ↑ competition
   • ↑ pace of innovation & invention
     • ↓ costs, ↑ dynamic efficiency
     • Create new G & S, ↑ I

5. Shocks

   • Unexpected ∆ production tech / step-changes in productivity of FoP shift LRAS
   • Nat. disasters/political turmoil affects productive potential
   • Temporary supply-side shocks shift SRAS