Also, the minimum wage has an impact on the long-run aggregate supply. That is because the potential output considers the natural unemployment rate. That means that the potential output considers all the workers employed at that level of economic production.
Changes in capital
When an economy experiences a rise in its capital stock, this enhances productivity, and as a result, more products and services can be delivered. As more products and services could be produced, the potential output in the economy would rise as well. This would cause the long-run aggregate supply to shift to the right.
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On the other hand, a drop in the economy’s capital stock affects productivity and the number of goods and services provided, pushing the long-run aggregate- supply curve to the left. This results in lower potential output.
Changes in natural resources
The natural resources of a country directly impact the production of the economy. Countries with rich natural resources have greater productivity and can produce more output than other countries. Discovering new materials and using new natural resources shift the long-run aggregate supply of a country to the right.
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On the other hand, depleting natural resources will result in lower potential output shifting the LRAS to the left.
Technological advancements
The advancement of technology is perhaps one of the most important factors influencing the long-run aggregate supply curve. Consider labor productivity before computers and after. The number of goods and services produced through computers while using the same labor has increased significantly.
When an economy experiences technological advancement, it will cause a rightward shift in the long-run aggregate supply. That is because it directly improves productivity allowing for more goods and services to be produced using the same labor and capital.
The aggregate supply curve would be shifted to the left in the long term if new restrictions were passed by the government prohibiting companies from employing certain manufacturing techniques due to worker safety or environmental concerns.
Long-Run Aggregate Supply Examples
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Let’s consider a country that sees an increase in foreign workers as an example of the long-run aggregate supply.
Before the migration of foreign workers, the economy was producing a certain amount of goods and services, and for this amount of goods and services, there was a certain number of workers being hired. What happens when more people start coming to the economy?
Hence, the overall result will increase potential output (rightward shift in LRAS). This is because an increase in aggregate demand and labor supply allows supply and demand to increase in tandem, moving to a higher equilibrium.
Difference Between Short-Run and Long-Run Aggregate Supply
The aggregate supply curve behaves quite differently in the short term than in the long term. The main difference between short-run and long-run aggregate supply is that short-run aggregate supply depends on the price level, whereas long-run aggregate supply does not depend on the price levels.
The long-term aggregate-supply curve is vertical because, in the long run, the general level of prices and wages does not impact the economy’s capacity to generate goods and services as they are flexible. Prices have a short-term impact on economic activity, though. Over a year or two, a rise in the overall level of prices in the economy tends to raise the number of goods and services provided, while a fall in the level of prices tends to lower the number of goods and services supplied. Consequently, the short-run aggregate supply curve is upward sloping.
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Category: WHY
