Long-run AS — Edexcel A-Level Economics A
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Long-run AS explained
Long-run aggregate supply (LRAS) is determined by the quantity and quality of factors of production and the efficiency with which they are used.
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Several factors shift the LRAS curve. Technological advances improve production methods, raising output per unit of input. Changes in relative productivity, such as when a country's productivity grows faster than its trading partners', improve international competitiveness and increase LRAS. Changes in education and skills raise human capital, making workers more productive. Changes in government regulations, such as reducing red tape or relaxing employment laws, can encourage investment and increase LRAS. Demographic changes and migration alter the labour force size. Finally, competition policy can force firms to become more efficient, shifting LRAS right.
Your focus
- Identify the factors that influence long-run aggregate supply, including technological advances and demographic changes.
- Explain how changes in relative productivity, education, regulations and competition policy shift the LRAS curve.
- Distinguish between factors that affect long-run AS and those that affect short-run AS.
Long-run AS exam tips
Marking Points
- Technological advances increase the productive potential of the economy by improving efficiency, which shifts the LRAS curve to the right.
- An increase in relative productivity means the economy can produce more output with the same inputs, shifting LRAS to the right.
- Improvements in education and skills raise the quality of human capital, increasing productivity and shifting LRAS to the right.
- A reduction in government regulations (e.g. cutting red tape) can increase investment and shift LRAS to the right; an increase in such regulations can shift LRAS to the left.
- Demographic changes such as an increase in the working-age population or inward migration of skilled workers can increase the size and quality of the labour force, shifting LRAS to the right.
- Competition policy that increases competition can force firms to become more efficient, shifting LRAS to the right.
Examiner Tips
- 💡Identify whether the factor affects the quantity or quality of factors of production, or the efficiency of their use, as these are the determinants of LRAS.
- 💡For each factor, consider whether it shifts LRAS to the right or to the left, and be prepared to explain the direction of the shift.
- 💡Distinguish between factors that affect LRAS and those that affect SRAS; for example, a change in the price of raw materials affects SRAS but not LRAS.
Common Mistakes
- Conflating tax policy with regulatory policy. Correction: lowering business taxes is fiscal policy, whereas changing government regulations involves altering rules like health and safety or employment laws.
- Misunderstanding: migration always reduces LRAS. Correction: inward migration of skilled workers can increase the size and quality of the labour force, shifting LRAS to the right.
- Misunderstanding: factors that affect short-run AS also affect long-run AS in the same way. Correction: some factors, such as changes in input prices, affect short-run AS but not long-run AS; long-run AS is determined by the productive capacity of the economy.
- Misunderstanding: competition policy has no effect on LRAS. Correction: by promoting competition, it can drive firms to become more efficient, increasing productive potential.