• Growth of the population or an increase in the labor force participation rate, both of which increase the quantity of labor available for production.


• Investment in capital goods prompted by lower interest rates, lower capital good prices, or technological advances, which increases the quantity of capital available for production.


• The discovery of new mineral deposits or fossil fuels, both of which increase the quantity of land resources available for production.


• An increase in education which increases the quality of labor resources.


• An increase in technology which increases the quality of capital resources.

Supply Increase Long-Run Aggregate Market

Consider what happens to this long-run aggregate market with an increase in aggregate supply. Suppose, for example, that changing customs and attitudes lead to an increase in the female labor force participation rate. This increases the total quantity of labor available for production. The result of this is a rightward shift of the LRAS curve. Click the [LRAS Increase] button to illustrate.

The result of this rightward LRAS curve shift is that a new long-run equilibrium is achieved at a lower price level (8) and a larger amount of full-employment real production ($120 billion). This result is comparable to that for a standard market. An increase in market supply results in a lower equilibrium price and a larger equilibrium quantity. The key difference, of course, is that this "market" is the aggregate product market for the entire economy and not the market for a specific good.

A comparative static analysis of the original equilibrium and the new equilibrium is useful and important. However, it is also instructive to dissect the adjustment process.

• First, the LRAS curve shifts rightward due to the increase in the quantity of labor induced by the increase in the female labor force participation rate. This "extra" aggregate supply creates an imbalance in the aggregate market. At the existing price level (which has NOT yet changed), buyers are willing and able to buy only $100 billion worth of real production. Producers, however, are now willing and able to sell $120 billion worth of real production. This creates economy-wide product market surpluses.


• Second, motivated by a build-up of inventories created by economy-wide product market surpluses, producers try to decrease production. In the short run they can do so by reducing the employment of resources, especially labor. In the long run, however, wage and resource price flexibility ensures that any imbalances in the resource markets are eliminated. Resource markets remain in equilibrium, meaning full-employment production is supplied. The only long-run result of attempts by producers to decrease production is a falling price level.


• Third, with the falling price level, buyers are induced to increase aggregate expenditures. The increase in aggregate expenditures acts to reduce the economy-wide product market surpluses. In fact, as long as these surpluses persist, the price level falls and aggregate expenditures rise. This continues until aggregate expenditures exactly match the new full-employment level of production. The end result is a new long-run equilibrium price level of 8 and an a new full-employment real production level of $120 billion.