Final answer:
Living standards rise in the long term primarily due to productivity growth, which means that more output is produced per worker leading to increases in GDP per capita and shifts in the AS curve to the right.
Step-by-step explanation:
The main reason living standards rise over the long run is due to productivity growth. Productivity refers to the amount of output that can be produced with a given amount of labor. A common measure of productivity is output per worker or GDP per capita. As productivity increases, the same amount of labor leads to more output, which in turn enhances living standards. The production function, which models this relationship, demonstrates that factors such as increased human capital can lead to higher wages and an improved budget constraint for families, which means they can afford a better standard of living.
In economic terms, this relationship is represented by a shift in the Aggregate Supply (AS) curve to the right, indicating higher productivity allows firms to produce more at every price level. This shift is presented in various economic models, showing the correlation between increased productivity and the potential GDP in a long-run model.