Which of the following events would cause an increase in the long run aggregate supply?

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What Is Aggregate Supply?

Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Typically, there is a positive relationship between aggregate supply and the price level.

Aggregate supply is usually calculated over a year because changes in supply tend to lag changes in demand.

Aggregate Supply

Aggregate Supply Explained

Rising prices are typically an indicator that businesses should expand production to meet a higher level of aggregate demand. When demand increases amid constant supply, consumers compete for the goods available and, therefore, pay higher prices. This dynamic induces firms to increase output to sell more goods. The resulting supply increase causes prices to normalize and output to remain elevated.

Key Takeaways

• Total goods produced at a specific price point for a particular period are aggregate supply.
• Short-term changes in aggregate supply are impacted most significantly by increases or decreases in demand.
• Long-term changes in aggregate supply are impacted most significantly by new technology or other changes in an industry.

Changes in Aggregate Supply

A shift in aggregate supply can be attributed to many variables, including changes in the size and quality of labor, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes, and subsidies and changes in inflation. Some of these factors lead to positive changes in aggregate supply while others cause aggregate supply to decline. For example, increased labor efficiency, perhaps through outsourcing or automation, raises supply output by decreasing the labor cost per unit of supply. By contrast, wage increases place downward pressure on aggregate supply by increasing production costs.

Aggregate Supply Over the Short and Long Run

In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process. In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency. Instead, the company ramps up supply by getting more out of its existing factors of production, such as assigning workers more hours or increasing the use of existing technology.

In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency. Such improvements include increases in the level of skill and education among workers, technological advancements, and increases in capital. Certain economic viewpoints, such as the Keynesian theory, assert that long-run aggregate supply is still price elastic up to a certain point. Once this point is reached, supply becomes insensitive to changes in price.

Example of Aggregate Supply

XYZ Corporation produces 100,000 widgets per quarter at a total expense of $1 million, but the cost of a critical component that accounts for 10% of that expense doubles in price because of a shortage of materials or other external factors. In that event, XYZ Corporation could produce only 90,909 widgets if it is still spending $1 million on production. This reduction would represent a decrease in aggregate supply. In this example, the lower aggregate supply could lead to demand exceeding output. That, coupled with the increase in production costs, is likely to lead to a rise in price.

(a) A higher price level- In the long-run, the level of real GDP is determined by the number of workers, the capital stock and the available technology. In the long run, as the firms adjust to changes in the price level, there will not be any changes in the number of workers, the capital stock, or technology. Therefore, changes in price level do not affect the level of real GDP as the economy will be running at its potential level in the long run. Thus, even at a higher price level, Long-run aggregate supply (LRAS) curve will remain constant.(b) An increase in the labor force - In the long run, the level of real GDP is determined by the number of workers, the capital stock and the available technology. An increase in labor force that is as the number of workers in the economy increase, potential real GDP also increases and this increase in potential real GDP shifts the long-run aggregate supply curve towards its right. Thus, in the long run an increase in labor force increases the potential GDP and shifts the LRAS curve towards its right.(c) An increase in the quantity of capital goods $-$ In the long-run, the level of real GDP or potential GDP is determined by the number of workers, the capital stock, and the available technology. Besides, an increase in the quantity of capital goods that is as the economy accumulates more machinery and equipment, potential real GDP also increases. Thus, these increases in potential real GDP due to increase in capital goods will shift the long-run aggregate supply curve towards its right.(d) Technological change - In the long-run, the level of real GDP or potential GDP is determined by the number of workers, the capital stock, and the available technology. A change in or improvement in technology will increase the potential capability of an economy to produce more output. Thus, a technological change or an improvement in technology increases the potential real GDP resulting in a rightward shift in the long-run aggregate supply curve.

Which of the following would cause an increase in long

What causes the LRAS to increase?

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What causes an increase in aggregate supply quizlet?