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A-Level Economics · LRAS shift right (long-run growth) diagram question

Output rises from Y₁ to Y₂ while the price level FALLS from P₁ to P₂. Why does inflation fall rather than rise?

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The answer

With more factors of production available, firms compete less aggressively for the same fixed pool of labour and capital, so unit costs and cost-push inflation fall. More capacity → less competition for scarce factors → slower wage and input-price growth → cost per unit falls → the price level falls. Point, cause, consequence: LRAS right → more factors of production available → firms compete less for the same fixed pool of labour and capital → wage and input-price growth slows → cost per unit falls → the price level falls from P₁ to P₂. And because unit costs are down, exports get cheaper in foreign-currency terms, so international competitiveness improves too.

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