3.2.8 Shifts of the AS curve over the long-run Notes

Shifts in the long-run aggregate supply occur when there is growth in the production possibilities of the economy:

1. If there is an increase in the production possibilities, the economy has grown its factors of production and so can produce more real output in the long-run (when there is full employment of resources).
2. Therefore, in the long-run, there is an increase in the real output an economy produces at all possible price levels.
3. This shifts the LRAS curve and the Keynesian AS curve.

Shifts in the LRAS curve

1. When there is an increase in the production possibilities of an economy, the LRAS curve shifts to the right (LRAS1→LRAS2) to a new potential output (Yp1→Yp2).
2. When there is a decrease in the production possibilities of an economy, the LRAS curve shifts to the left (LRAS1→LRAS3) to a new potential output (Yp1→Yp3).

Shifts in the Keynesian AS curve

1. When there is an increase in the production possibilities of an economy, the Keynesian AS curve shifts to the right (AS1→AS2) to a new potential output (Yp1→Yp2).
2. When there is a decrease in the production possibilities of an economy, the Keynesian AS curve shifts to the left (LRAS1→LRAS3) to a new potential output (AS1→AS3).

Determinants of aggregate supply over the long-run

1. While changes in the PL cause movements along the LRAS curve / Keynesian AS curve, changes in the production possibilities of the economy shift the curves.
2. The factors that change the production possibilities of an economy can hence be understood as the determinants of aggregate supply over the long-run.

The determinants of aggregate supply over the long-run covered in the IB curriculum are:

1. Changes in the quantity and/or quality of factors of production.
2. Improvements in technology.
3. Increases in efficiency.
4. Changes in institutions.

Changes in the quantity and/or quality of factors of production

Increase in the quantity and/or quality of factors of production → rightward shift in LRAS / AS

1. Factors of production refer to the resources used in the production process: land, labor, capital, and entrepreneurship.
2. If the quantity of factors of production increases (larger labor force, discovery of new resources, or increased capital stock...), the economy's production possibilities increases.
3. Similarly, improvements in the quality of factors of production (higher-skilled workers, better technology, or more efficient capital...) also increases the economy's productivity.
4. Since long-run aggregate supply represents the economy's potential output at full employment, an increase in the quantity and/or quality of resources increases the economy's potential output through a growth in production possibilities.
5. This shifts the LRAS curve / AS curve to the right (LRAS1→LRAS2 / AS1→AS2).

Decrease in the quantity and/or quality of factors of production → leftward shift in LRAS / AS

1. Factors of production refer to the resources used in the production process: land, labor, capital, and entrepreneurship.
2. If the quantity of factors of production decreases (shrinking labor force due to aging population or emigration, depletion of natural resources, or reduced capital stock...), the economy's production possibilities decreases.
3. Similarly, declines in the quality of factors of production (poorly educated workforce, outdated technology, or inefficient capital...) also decreases the economy's productivity.
4. Since long-run aggregate supply represents the economy's potential output at full employment, a decrease in the quantity and/or quality of resources decreases the economy's potential output through a decrease in production possibilities.
5. This shifts the LRAS curve / AS curve to the left (LRAS1→LRAS2 / AS1→AS2).