What determines how much an economy can produce in the short and long run?
Short-run aggregate supply and its determinants, long-run aggregate supply, the Keynesian and classical LRAS curves, and the factors that shift the productive capacity of an economy.
An Edexcel A-Level Economics A answer to aggregate supply, covering the determinants of short-run aggregate supply, the difference between the classical and Keynesian long-run aggregate supply curves, and the factors that shift the productive potential of the economy.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
Edexcel wants you to explain what shifts short-run aggregate supply, distinguish the classical and Keynesian views of long-run aggregate supply, and explain the factors that change the productive potential of the economy.
Short-run aggregate supply
SRAS shifts when costs of production change: wages, raw material and imported input prices, the exchange rate (a weaker pound raises import costs), indirect taxes and subsidies, and productivity. A rise in oil prices, for example, shifts SRAS left, raising the price level and lowering output (cost-push inflation).
Long-run aggregate supply
The practical implication is large. On the classical view, a rise in AD raises only the price level in the long run, so demand management cannot sustainably raise output. On the Keynesian view, with spare capacity (as in a deep recession), demand stimulus can raise real output with little inflation.
LRAS shifts right with anything that raises productive potential: more or better-skilled labour (net migration, training), investment in capital, new technology, higher productivity, improved infrastructure, and competition or enterprise reforms. The UK's persistently weak productivity growth since 2008 (the "productivity puzzle") is a key reason LRAS has shifted out only slowly.
Examples in context
- 2022 energy crisis. Surging gas prices after the invasion of Ukraine shifted UK SRAS left, driving CPI inflation above 11 per cent while growth stalled, a textbook cost-push, stagflationary shock.
- The productivity puzzle. Flat UK productivity since 2008 has limited rightward LRAS shifts and is central to Theme 2 essays on long-run growth.
- Net migration. Inflows of working-age migrants expand the labour force, a real-world cause of a rightward LRAS shift.
- Apprenticeship levy. A UK supply-side measure intended to raise skills and shift LRAS right over time.
Try this
Q1. Explain one factor that would shift SRAS to the left. [3 marks]
- Cue. A rise in wages, raw material prices or import costs raises firms' costs, reducing supply at each price level.
Q2. Explain the difference between the classical and Keynesian LRAS curves. [4 marks]
- Cue. Classical is vertical at full employment; Keynesian is L-shaped, horizontal with spare capacity and vertical at full capacity.
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20194 marksExplain, using a diagram, how a sharp rise in world oil prices would affect short-run aggregate supply and the price level.Show worked answer →
A short explain question rewarding an applied diagram and chain of analysis.
Oil is an input for most firms, so a price rise increases costs of production at every output level, shifting SRAS to the left. On an AD-AS diagram with the price level on the vertical axis and real output on the horizontal, the new SRAS gives a higher price level and lower real output (cost-push inflation with falling output, or stagflation).
Markers reward (1) the leftward SRAS shift, (2) the cause (higher input costs), (3) the result of a higher price level and lower output, ideally labelled on a diagram.
Edexcel 202210 marksExamine the view that the shape of the long-run aggregate supply curve determines whether demand-side policy can raise real output without inflation.Show worked answer →
A 10 mark examine question (around 7 KAA, 3 evaluation).
KAA: contrast the classical vertical LRAS (a rise in AD only raises the price level in the long run, so demand policy cannot raise output sustainably) with the Keynesian L-shaped LRAS (where there is spare capacity, a rise in AD raises output with little inflation; near full capacity it becomes inflationary).
Evaluation: the answer depends on where the economy sits relative to capacity, the size of the output gap and the time horizon. In a deep recession Keynesian logic applies; near full employment classical logic dominates. Reach a supported judgement.
Markers reward two contrasting diagrams and context.
Related dot points
- The components of aggregate demand, the determinants of consumption, investment, government spending and net trade, and the shape and shifts of the AD curve.
An Edexcel A-Level Economics A answer to aggregate demand, covering the four components C, I, G and X minus M, the determinants of consumption and investment, the shape of the AD curve and the factors that shift it, and the role of the marginal propensity to consume.
- The circular flow of income, injections and withdrawals, equilibrium real national output, and the multiplier effect.
An Edexcel A-Level Economics A answer to national income and equilibrium, covering the circular flow of income, injections and withdrawals, macroeconomic equilibrium where AD meets AS, and the multiplier effect including the formula based on the marginal propensities.
- Actual and potential growth, the causes of short-run and long-run growth, the output gap, the economic cycle, and the costs and benefits of growth.
An Edexcel A-Level Economics A answer to economic growth, covering actual and potential growth, the demand-side and supply-side causes of growth, positive and negative output gaps, the phases of the economic cycle, and the costs and benefits of growth for individuals and the environment.
- The main macroeconomic objectives, fiscal policy, monetary policy, supply-side policies, the conflicts between objectives, and the use of policies in different contexts.
An Edexcel A-Level Economics A answer to macroeconomic objectives and policies, covering the main objectives of growth, low inflation, low unemployment and a stable current account, the tools of fiscal, monetary and supply-side policy, and the conflicts and trade-offs between objectives.
Sources & how we know this
- Pearson Edexcel A-Level Economics A (9EC0) specification — Pearson Edexcel (2015)