2.3.3. Factors Influencing Long Run Aggregate Supply

This Edexcel A-Level Economics study note covers Factors Influencing Long Run Aggregate Supply.

Introduction

Long-run aggregate supply (AS) reflects the total output an economy can produce when all resources are fully employed. Several factors influence long-run AS, shaping the potential output of an economy over time.

Key Factors Influencing Long-Run AS

Technological Advances

• Impact: Technological improvements increase productivity, allowing more output from the same input of labor and capital.
• Examples:
  • The Industrial Revolution, which introduced machinery that enhanced production processes.
  • Modern-day advancements in information technology, which have streamlined communication and data management, boosting productivity across sectors.

Changes in Relative Productivity

• Impact: Increases in productivity in one sector relative to others can shift resources, optimizing the overall efficiency of the economy.
• Examples:
  • The shift from manufacturing to service-oriented industries in advanced economies, driven by higher productivity in technology and finance sectors.
  • Agricultural productivity improvements in developing countries, freeing labor for industrial and service sectors.

Changes in Education and Skills

• Impact: A more educated and skilled workforce can produce more output and adapt to new technologies, enhancing long-run AS.
• Examples:
  • Investments in STEM (Science, Technology, Engineering, and Mathematics) education leading to a more innovative workforce in countries like South Korea.
  • Vocational training programs in Germany that equip workers with specialized skills, increasing productivity.

Changes in Government Regulations

• Impact: Regulations can either constrain or enhance productivity. Deregulation can lead to increased efficiency, while excessive regulation can stifle innovation and growth.
• Examples:
  • Deregulation of the airline industry in the United States in the late 1970s, which increased competition and efficiency.
  • Stringent environmental regulations in the European Union that, while protecting the environment, may increase production costs in certain industries.

Demographic Changes and Migration

• Impact: Population growth, aging, and migration patterns significantly affect the labor supply and thus long-run AS.
• Examples:
  • Japan’s aging population leading to a shrinking workforce and lower potential output.
  • Migration influxes in the United States and Germany, contributing to a growing labor force and economic expansion.

Competition Policy

• Impact: Policies that promote competition can lead to more efficient markets and higher productivity.
• Examples:
  • Antitrust laws in the United States that prevent monopolies and promote competitive markets.
  • The European Union’s policies to reduce barriers to entry in various industries, fostering innovation and efficiency.

Glossary

• Aggregate Supply (AS): The total quantity of goods and services that firms are willing and able to produce at different price levels.
• Productivity: The efficiency with which inputs are converted into outputs, typically measured as output per hour worked.
• STEM: An acronym for Science, Technology, Engineering, and Mathematics, fields crucial for technological and scientific advancement.
• Deregulation: The process of removing government restrictions and regulations in an industry to promote efficiency and competition.
• Antitrust Laws: Legislation to prevent monopolies and promote competition in the marketplace.

Key Economists

• Robert Solow (1924-2024):
  • Known for the Solow Growth Model, which emphasizes the role of technological progress in economic growth.
  • Key work: "A Contribution to the Theory of Economic Growth" (1956).
• Paul Romer (1955-):
  • Developed endogenous growth theory, highlighting the importance of technological innovation and knowledge.
  • Key work: "Endogenous Technological Change" (1990).
• Joseph Schumpeter (1883-1950):
  • Known for his theory of creative destruction, where innovation drives economic growth by displacing outdated technologies.
  • Key work: "Capitalism, Socialism and Democracy" (1942).

Possible Essay-Style Questions

1. Analyze the role of technological advances in shaping long-run aggregate supply. Use historical and contemporary examples to support your argument.
2. Discuss how changes in education and skills affect an economy's long-run aggregate supply. Include real-world examples of educational policies and their economic impacts.
3. Evaluate the impact of government regulations on long-run aggregate supply. Compare and contrast the effects of deregulation and stringent regulation in different industries.
4. How do demographic changes and migration influence long-run aggregate supply? Discuss with reference to specific countries that have experienced significant demographic shifts.

Further Reading

• Solow Growth Model - Investopedia
• Endogenous Growth Theory - Econlib
• Creative Destruction - Schumpeter
• The Impact of Education on Economic Growth - OECD