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how competition policy influences long run aggregate supply

how does government policies to prevent and reduce the abuse of monopoly power influence long run aggregate supply? and which way does the curve shift? someone please help me.

Reply 1

Speckle

More competition / monopoly unable to exploit consumers; LRAS will shift right

Reply 2

Donald Draper

Government policies that reduce the abuse of monopoly power cause increased competition in the market, meaning that firms (including firms that were previously working monopolies) will become more efficient due to a reduction in X-inefficiency. They will achieve this increased efficiency through lowering their costs, which thereby increases their productive efficiency. Lower costs also affect LRAS, causing it to shift right, since the firms can now produce a higher quantity at the same total cost.

Reply 3

MagicNMedicine

Donald Draper has got it right you just need to explain why increased competition leads to greater efficiency - the threat (or reality) of entry means firms will have to either lower their costs or differentiate their product through higher quality in order to compete; the entry of more efficient firms will drive less efficient firms out of the market and so on.

Also monopoly power means firms are charging a higher price for goods than the competitive market price (where P = MC), so if you erode market power you drive prices down towards the competitive price. This is important for the production of other goods as well, if you use some raw materials or intermediate goods in your production, and you have to purchase those from a monopolist, but then competition policy erodes monopoly power and so those raw materials or intermediate goods fall in price, then that reduces the costs of your production so even if your firm wasn't directly affected by the competition policy change, you now have lower costs. This is also going to help the economy's LRAS.