Macro Foundations · intermediate
What moves on the Aggregate Supply – Aggregate Demand diagram
A larger labor force raises productive capacity (LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. right) and eases wage costs (SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. right).
Start at long-run equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
Immigration expands the labor force, one of the economy's fundamental resources.
Potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust. rises. LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. shifts right; greater labor supply also eases wage pressure, shifting SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. right.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: higher output, lower price-level pressure.
(Migrants also add demand, an offsetting AD-right effect covered in the Advanced aside.)
Examiners ask this as: immigration, labor force growth, migration boom, skilled migration, population growth workforce.
Other scenarios on Aggregate Supply – Aggregate Demand