1. Long run aggregate Supply

2. Learning objectives
To be able to identify and explain the three gradients on an long run aggregate supply curve
To become familiar with the components of long run aggregate supply
To appreciate the difference between the short run aggregate supply (SRAS)curve and the long run aggregate supply (LRAS) curve
To be able to distinguish between inward and outward shifts of the long run aggregate supply curve

3. Aggregate Supply (long run, Keynesian)
The price level makes reference to the retail price index (RPI).
Real output refers to the quantity of goods and services produced in the economy.
0A refers to the level of output where the factors of production are used to the optimum.
As output beyond 0A the factors of production become scare, this is most notable in the labour market.
The scarcity causes their price to rise thus increasing the price level.
There comes a point at which the factors of production become exhausted. This is most notable in the labour market and is known as the full employment level of output.
Price level AS
Real output A B
Optimum
Capacity output
Full
Capacity output

4. Combining the components of AS
Land
Labour
Capital
Entreprenueship
Current stock of premises
Education
Internal Finance
Number of entrepreneurs
Brownfield sites
Construction
External finance
Enterprise culture
Green field sites
Retail
Plant &
Machinery
Enterprise education
Rapeseed
Engineering
Attitudes to risk taking
Wheat
Agriculture
Imagine a series of individual supply curves for the following:-
These are combined to produce the AS curve.
Price level AS
Real output

5. Aggregate Supply (long run)
The long run aggregate supply curve (LRAS) is vertical when all factors of production are fully employed.
Price level
LRAS1
Real output

6. Aggregate Supply (long run, Classical)
The LRAS will shift as a there is a change in the availability of the factor of production.
Land - The discovery of new natural resources.
Labour - an increase in the working population
Capital - Improvements in technology
Entrepreneurship- Improvements in entrepreneurial culture (a more free market approach to running the economy).
Price level
LRAS1
LRAS2
Real output

7. Short run and long run aggregate supply curve