The long-run aggregate supply (Lras) curve is the relation between the national income and the average national price level, or nominal GDP and price level. The Lras curve shifts due to changes in wage inflation, productivity growth, and unemployment.
The position of the Lras curve determines whether there will be economic inflation or deflation in the long run. A downward-sloping Lras curve indicates that economic growth will lead to a decrease in the average national price level, or deflation. An upward-sloping Lras curve indicates that economic growth will lead to an increase in the average national price level, or inflation.
Changes in labor productivity and wages influence the position of the Lras curve. If labor productivity increases, then there will be a shift of the Lras curve to the right due to an increase in national income per unit of output. If wages increase, then there will be a shift of the LAS curve to the left due to an increase in what workers receive for each unit of output.
Changes in economic growth
The long-run aggregate supply (Lras) curve shifts due to changes in economic growth. When growth is faster, output increases and inflation increases, shifting the Lras curve to the right.
When growth is slower, output decreases and inflation decreases, shifting the Lras curve to the left. Changes in economic growth can be caused by changes in investment, technology, productivity, and/or population growth.
Changes in investment can influence the Lras curve by changing the amount of capital available to workers. More investment allows for more production and higher wages, pushing up costs. Less investment lowers production and wages.
Changes in technology can shift the Lras curve left or right depending on its effect on productivity. Less productive technology would shift the curve left while more productive technology would shift the curve right.
Changes in productivity
The position of the long-run aggregate supply (Lras) curve is determined by changes in productivity.
If productivity increases, then more goods and services can be produced with the same amount of resources. This would shift the Lras curve to the right.
If productivity decreases, then less goods and services can be produced with the same amount of resources. This would shift the Lras curve to the left.
In either case, a higher price must be paid for each unit of output due to the decrease in productivity. This would result in a lower GDP when moving from a point on the LRAS curve to another point on the LRAS curve.
The LRAS curve can shift either left or right depending on changes in productivity across industries and time periods. Increased productivity in some industries while others decline will cause this shift.
Changes in the rate of inflation
The long-run aggregate supply curve is influenced by changes in the rate of inflation. Inflation is a significant factor in the LRAS equation, as labor costs are one of the components that affect the real wage.
If the price level increases, then the value of the wage must also increase in order to keep real wages the same. This is because if the price level increases, then goods and services become more expensive.
Workers must be paid more in order to keep up with rising prices. A higher wage increase due to inflation means a higher cost of production, shifting up the LRAS curve. Decreases in inflation have the opposite effect and shift down the LRAS curve.
However, other factors such as technology and productivity also play a role in determining where the LRAS curve lies.
Change in supply of labor
The supply of labor can change in two fundamental ways. The first way is through changes in the number of workers in the economy.
The second way is through changes in how much workers earn for a given amount of work. If workers earn less, then there will be an incentive to work less, thus reducing supply.
Changes in the number of workers can happen due to demographic shifts such as retirement or immigration. Changes in wage can occur due to inflation or technology improvements that make production cheaper.
Overall, long-run aggregate supply depends on the stability of the underlying factors that determine the size and composition of the labor force and how much labor earns for a given amount of work. (via: The Position of the Long-Run Aggregate Supply (Lras) Curve Is Determined By).
Change in demand for goods
The position of the LRAS curve is determined by the change in demand for goods. If consumers demand more goods, producers will need to increase production to fulfill that demand.
This requires investments in additional capital and labor, which increases the cost of production. Therefore, producers will need to raise prices to cover these increased costs.
A higher price for goods causes the LRAS curve to shift right. A lower price for goods causes the LRAS curve to shift left. No matter what the good is, a lower price will cause more of it to be demanded and produced.
Change in supply of factors of production
The other main factor that determines the position of the LRAS curve is changes in the supply of factors of production. If the supply of any factor increases, then production costs increase and producers have to raise prices to cover these increases. This shifts the LRAS curve right.
The long-run aggregate supply curve shifts due to changes in any of these factors
The position of the long-run aggregate supply (Lras) curve is determined by changes in the following factors: average labor productivity, the nominal wage, the price level, and inflation expectations.
Average labor productivity refers to the average amount of goods and services produced per hour worked. If average labor productivity increases, then more goods and services are produced per hour worked and the value of each good or service increases.
Nominal wage refers to the cash amount paid to a worker for one hour of work. If the nominal wage increases, then workers receive more money per hour worked and they spend more money on basic needs (like food and shelter) which in turn increases economic activity.
The price level refers to the overall average level of prices of all goods and services in an economy. If the price level decreases, then economically active individuals have more purchasing power which leads to increased economic activity.
Inflation expectations refer to how likely people believe prices will increase in the future. If people believe that prices will increase in the future, then they will purchase more now before those higher prices occur which increases economic activity.
