long run aggregate supply

Most supply-side policies are designed to improve the long-term performance of the economy. They clearly have short run effects - but we should really judge supply-side policies by measuring the extent to which the United Kingdom economy is able to sustain economic growth over a number of years and raise total employment and average living standards.

Long run aggregate supply is determined by the productive resources available to meet demand and also by the productivity of factor inputs (labour, land and capital). Changes in technology also affect the potential level of national output in the long run.

In the short run, producers respond to higher demand (and prices) by bringing more inputs into the production process and increasing the utilization of their existing inputs. Supply does respond to change in price in the short run - we move up or down the short run aggregate supply curve.

In the long run we assume that supply is independent of the price level (money is said to be neutral) - the productive potential of an economy (measured by LRAS) is driven by improvements in productivity and by an expansion of the available factor inputs (more firms, a bigger capital stock, an expanding active labour force etc). As a result we draw the long run aggregate supply curve as vertical.

Improvements in labour productivity and efficiency cause the long-run aggregate supply curve to shift out over the years