Study Notes
2.3.3. Factors Influencing Long Run Aggregate Supply
- Level:
- A-Level
- Board:
- Edexcel
Last updated 10 Jul 2024
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
- Analyze the role of technological advances in shaping long-run aggregate supply. Use historical and contemporary examples to support your argument.
- 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.
- Evaluate the impact of government regulations on long-run aggregate supply. Compare and contrast the effects of deregulation and stringent regulation in different industries.
- 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
You might also like
![](https://tutor2u-net.imgix.net/user-photos/gbr_profile.jpg?auto=compress%2Cformat&crop=focalpoint&fit=crop&fp-x=0.5&fp-y=0.5&h=100&q=80&w=100)
Slow productivity in the UK economy
15th March 2015
![](https://tutor2u-net.imgix.net/user-photos/gbr_profile.jpg?auto=compress%2Cformat&crop=focalpoint&fit=crop&fp-x=0.5&fp-y=0.5&h=100&q=80&w=100)
Planning restraints keep London house prices higher
10th March 2016
The UK Productivity Gap
Study Notes
The UK Productivity Gap
Topic Videos
![](https://tutor2u-net.imgix.net/user-photos/gbr_profile.jpg?auto=compress%2Cformat&crop=focalpoint&fit=crop&fp-x=0.5&fp-y=0.5&h=100&q=80&w=100)
High Gas Prices - Effects on Businesses and the UK Economy
17th March 2023
![](https://tutor2u-net.imgix.net/user-photos/gbr_profile.jpg?auto=compress%2Cformat&crop=focalpoint&fit=crop&fp-x=0.5&fp-y=0.5&h=100&q=80&w=100)
Brewed to Perfection or Priced Out? The Future of Tea
22nd July 2024