A-LEVEL ECONOMICS

Aggregate Supply

Long Run Aggregate

Supply (LRAS)
 What do we mean by
long run aggregate
supply? (LRAS)

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 Long Run Aggregate Supply

Long run aggregate supply (LRAS)

represents the maximum possible
output; it is like a country’s PPF. It
represents that maximum output when
all factors of production are fully and
efficiently employed.

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 Labour Productivity

A measure of efficiency indicated by

output per person employed or value
of output per hour worked.

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 Infrastructure

Infrastructure includes physical

capital such as transport networks,
energy, power and water supplies
and telecommunications networks

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 How is the PPF linked
to long run aggregate
supply?

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 EXPLAINING AN OUTWARD SHIFT IN THE PPF

• Increase in Natural Resources: For example, if a country discovers new oil and
gas reserves, it can increase its production capacity in the energy sector.
• Technological Advancements: Technological progress allows an economy to
produce more output with the same resources or to produce existing output
more efficiently. Technological progress can drive higher productivity.
• Human Capital Development: Better-educated and more skilled workers can
increase productivity, leading to the production of more goods and services.
• Investment in Capital: Increased investment in physical capital, such as
infrastructure, machinery, and technology, can enhance an economy's
productive capacity and then lead to an outward shift of the PPF.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 Output of
wheat

Shifts in the
Production
Possibility Curve

For the PPC to shift outwards

there needs to be either an
increase in the factor inputs
available or an improvement PPC1 PPC2
in the efficiency of supply.

B Beef
 Output of
wheat

Shifts in the
Production
Possibility Curve D

An outward shift of the PPC

means that total output of
both beef and wheat can
increase. This is an PPC1 PPC2
improvement in a country’s
potential output (this is
economic growth.) B C Beef
 Output of
wheat

Shifts in the
Production D
Possibility Curve

An outward shift of the PPC

also means that output of
wheat can be increased
without having to sacrifice PPC1 PPC2
any output of beef.

B Beef
 OVERVIEW OF KEY CAUSES OF PPF SHIFTING OUT
Cause of an outward shift in the PPC
• Higher productivity / efficiency of
factor inputs
• Better management of factor inputs
• Increase in the stock of capital and
labour supply
• Innovation and invention of new
products and resources
• Discovery / extraction of new natural
resources (land)
PRODUCTION POSSIBILITIES
Comment on the cause of the shift in the PPC
This increases the output per unit of an input
used in production
Improved management reduces waste and
improves product quality
From inward labour migration / increased capital
investment
Improved production processes lift efficiency
(making more with less)
Discovery of commercially-viable land inputs
drives extraction
TUTOR2U.NET/ECONOMICS
 What are the key
drivers of long run
aggregate supply?

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

KEY FACTORS INFLUENCING LONG RUN AGGREGATE SUPPLY

Innovation and
Higher Productivity of Growing Population & Capital Investment
Enterprise
Labour and Capital Increased Labour Including capital Stock of natural
Market Participation Product and process (environmental
I.e. a rise in output per spending by
innovation from resources) e.g.
person employed or i.e. A growing labour businesses, inward
research and renewables, stocks of
the increased supply and a rise in the investment (FDI) and
development and natural resources
efficiency of number of people in the Public Sector
higher rate of increase
technology paid work (Government)
of business start-ups

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 THE LONG RUN AGGREGATE SUPPLY CURVE
Long Run
General Price
Aggregate
Level (GPL)
Supply

YP Real GDP (Y)

 SHIFT IN THE LONG RUN AGGREGATE SUPPLY CURVE
Long Run LRAS2
General Price
Aggregate
Level (GPL)
Supply

An outward shift of
LRAS signifies an
increase in potential
output and
employment and
signifies real
economic growth.

YP YP2 Real GDP (Y)

 SHIFT IN THE LONG RUN AGGREGATE SUPPLY CURVE
Long Run LRAS2
General Price
Aggregate
Level (GPL)
Supply

An outward shift of In the long run, the ability of

LRAS signifies an an economy to produce
increase in potential goods and services to meet
output and demand is based on the state
employment and of technology and the
signifies real availability and quality of
economic growth. factor inputs.

YP YP2 Real GDP (Y)

KEY FACTORS INFLUENCING LONG RUN AGGREGATE SUPPLY

Changes in a nation’s potential GDP are largely brought about by:

1. Changes in labour supply available for production (i.e. more people joining the
labour force)
2. Changes in the stock of capital inputs including infrastructure
3. Changes to the stock of natural resources
4. Changes in the efficiency of allocation of factor inputs e.g. shifting resources
from rural to urban areas
5. Improvements in the quality of inputs / productivity
6. Advances in the state of technology (web, AI, renewables)
7. Improvements in institutions such as banking/legal system

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

IMPORTANCE OF INFRASTRUCTURE FOR DEVELOPMENT

Off-grid renewables Transport Mobile money Drone technologies

infrastructure systems to improve health
care

Improved irrigation Border Basic sanitation Waste disposal

in farming infrastructure systems

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

IMPORTANCE OF INFRASTRUCTURE FOR DEVELOPMENT

Off-grid renewables Transport Mobile money Drone technologies

infrastructure systems to improve health
care

Improved irrigation Border Basic sanitation Waste disposal

in farming infrastructure systems

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 KEYNESIAN AGGREGATE SUPPLY CURVE
General Price
Aggregate Supply
Level (GPL)

YFC Real GDP (Y)

 EXPLAIN THE SHAPE OF THE KEYNESIAN AS CURVE

 When spare capacity is high, aggregate supply will be elastic: this means that a rise
in aggregate demand can be met easily by increased output and there is little threat
of rising prices (inflation)
 The elasticity of the curve falls as a country moves through an economic cycle:
1. The amount of spare capacity declines
2. There is the possibility of diminishing returns in production
3. Bottlenecks appear in the supply of key inputs including skilled labour
 When AS is perfectly inelastic, an economy is at full capacity (equivalent to being on
the PPF boundary); this means that further increases in AD are purely inflationary in
the short run with little extra real output

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

Real GDP (Y) YFC YFC2

 How do we show long
run economic growth
using a Keynesian
Aggregate Supply Curve?

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC YFC2

LONG RUN GROWTH – AN OUTWARD SHIFT OF AS
General Price AS1 AS2
Level (GPL)

GPL1

AD1 AD2

Real GDP (Y) Y1 YFC Y2 YFC2

 The position of the long run aggregate supply curve for an economy
1 depends upon the

* A Size and quantity of the labour force and capital stock

* B Size of budget deficit

* C Rate of inflation

* D Size of trade deficit

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 The difference between short run aggregate supply and long run aggregate
2 supply can be summed up by which statement?

In the short run, all factors of production are fixed whereas in the long run
* A all factors of production are variable.

In the short run workers cannot work overtime and producers cannot react
* B quickly to market prices.

The short run refers only to periods of time up to 6 months, whereas the
* C long run refers to periods of time longer than six months.

In the short run, capital is assumed to be fixed whereas in the long run, all
* D factors of production are variable.

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 Which of the following CANNOT cause a shift of the SRAS curve to SRAS1
3 or SRAS2?

Changes in wages, prices of raw

* A materials or prices of imports

* B Changes in average price level

Supply shocks resulting from natural

* C disasters, epidemics or other
unexpected calamities

Changes in indirect taxes or

* D subsidies

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS

 Which one of the following factors CANNOT cause a shift in LRAS as shown
4 below?

* A Improved infrastructure

* B Increased availability of resources

* C Lower average price level

* D Improved technology

AGGREGATE SUPPLY TUTOR2U.NET/ECONOMICS