2.3.3

Question 1

Why is the classical LRAS curve vertical

Answer 1

In the Long run, firms have capacity constraints I.e there is a limit to amount of labour than can be hired in an economy and capital equipment is fixed in supply so it is argued in the long run that the AS curve is fixed at a given level of real output whatever the price because of those constraints

Question 2

Whta does LRAS curve show

Answer 2

Productive potential of an economy
- how much real output can be produced over a period of time with a given level of factor inputs (e.g labour and capital) and the given level of efficiency in combining these factors

Question 3

What else can LRAS be linked to

Answer 3

PPF and trend rate of growth for an economy

Question 4

How do LRAS and PPF link

Answer 4

LRAS curve shows level of output associated with production on the PPF of an economy

Question 5

Compare short run AS and Long run AS

Answer 5

• In the short run it is possible for an economy to ​exceed the maximum potential LRAS by allowing factors of production to ​work overtime or not allow time for maintenance of machinery etc.
• However, this is ​not possible in the long run as machines will eventually stop and workers will want a break.

Question 6

State the factors affecting LRAS

Answer 6

• tech advances
• changes in relative productivity
• changes in education and skills
• changes in gov regulation
• demographic changes and migration
• competition policy

Question 7

How do tech advances affect LRAS

Answer 7

• Improvements in technology mean new products to be made or existing products to be produced with fewer resources Increases in capital productivity (output per unit of capital employed) shift the LRAS curve to the right.

Question 8

Changes in relative productivity to competing economies.

Answer 8

• An increase in UK productivity of a good relative to other world economies will encourage production of that good in the UK.
• Firms will invest, shifting the AS curve to the right
• LRAS of the world economy will increase if there is increased specialisation between economies, allowing production to be located in the cheapest more efficient place in the world economy

Question 9

Changes in education and skills

Answer 9

Better education and training leads to more productive individuals (increased labour productivity) so LRAS increases

Question 10

Changes in gov regulations

Answer 10

Removal of unnecessary rules and red tape can increase LRAS
WHY
- makes it simpler to set up a company and encourages more entrepreneurs to create companies, output and jobs

Question 11

Demographic changes and migration

Answer 11

• Skilled workers migration to a country can increase economy’s capacity as size of workforce increases so productive potential of an economy increases

Question 12

Factor mobility (not on spec)

Answer 12

With training schemes, occupation labour immobility can be reduced
So increase in factor mobility increase LRAS

Question 13

Competition policy

Answer 13

Greater competition in an economy as a result of gov policies will cause inefficient firms to close and be repalaced by more efficient firms,
- firms are forced to become more productive and reduce their costsor more innovative by producingnew products and new ways fo rpoducing goods and services
increase an economy’s capacity and therefore productive potential

Question 14

How does a firm become more efficient

Answer 14

Find ways to: cut cost, become more productive, new ways to make goods and services, more innovation

Usually this happens when there is increased competition

Question 15

What is assumed with LRAS

Answer 15

in long run, economy assumed to move towards equilibrium where all resources are being used to full capacity (so economy running at its full productive potential)

Question 16

What is the comparison between shifts in SRAS and LRAS

Answer 16

SRAS shifts caused by anything that changes costs of production
LRAS shifts caused by anything that changes quality AND quantity of factors of production

Question 17

In the short run why is an increase in output by firms likely to lead to an increase in prices?

Answer 17

• in the short run, sras is elastic as firms can respond to price changes
• If real output is to increase in the short run, firms will have to pay wages to workers or more moeny for quick delivery of raw materials, etc.
• As such, as real output rises, cost per unit to the firms and industries are likely to rise
• increase costs will tend to be passed on to the consumer through higher prices, so the increase in real output results in a rise in the average price level (likely to be small though as rise in costs is small)

Question 18

How can firms increase output in short run

Answer 18

• too expensive to take on new staff so just incentives curren workers to do overtime (work harder/longer) by offering bonuses

Question 19

Classical view of LRAS

Answer 19

Shows in the long run an economy will operate at full capacity and there will be no unemployed resources in an economy

Question 20

What is a rightwards shift in LRAS a sign of

Answer 20

Economic growth

Question 21

What does a leftwards shift in LRAS represent

Answer 21

Fall in productive potential of an economy