Long-run aggregate supply curve (LRAS)

Definition

The long-run aggregate supply curve (LRAS) represents the total output of goods and services that an economy can produce when utilizing all of its resources efficiently at full employment. It is vertical because, in the long run, the economy’s output is determined by factors like technology, capital, and labor, rather than price levels. Understanding LRAS is crucial for analyzing economic growth and the potential output of an economy.

5 Must Know Facts For Your Next Test

1. The LRAS curve is vertical at the level of potential GDP, indicating that changes in price levels do not affect the total output in the long run.
2. Factors that can shift the LRAS include advancements in technology, increases in capital stock, and changes in labor force participation.
3. In the long run, economies can adjust to changes in demand through shifts in LRAS rather than relying solely on price level changes.
4. The concept of LRAS helps policymakers understand how to stimulate long-term economic growth rather than just focusing on short-term fluctuations.
5. When LRAS shifts to the right, it indicates economic growth, as the economy can produce more goods and services at full employment.

Review Questions

• How does the LRAS curve illustrate the relationship between potential output and price levels in an economy?
  • The LRAS curve illustrates that potential output remains constant regardless of changes in price levels because it reflects full employment and efficient resource use. In the long run, an economy’s capacity to produce goods and services is determined by its resources and technology rather than prices. This vertical nature of the LRAS indicates that fluctuations in demand will not impact the long-run output level.
• Evaluate how shifts in LRAS can affect economic growth and policy decisions.
  • Shifts in LRAS can have significant implications for economic growth. When LRAS shifts right due to increased productivity or resource availability, it signals potential for economic expansion. Policymakers may respond with strategies aimed at fostering investment in technology or education to sustain this growth. Conversely, a leftward shift may indicate challenges such as resource depletion or declining productivity, prompting policies focused on stabilizing the economy.
• Analyze the factors that might lead to a leftward shift in the LRAS curve and their broader economic implications.
  • A leftward shift in the LRAS curve could occur due to factors like natural disasters reducing productive capacity or a decline in labor force participation. Such shifts signify a decrease in potential output and could lead to higher unemployment and inflationary pressures as resources become less efficiently utilized. The broader implications include potential stagnation in economic growth, prompting urgent policy interventions to address underlying issues affecting productivity and resource allocation.

Related terms

Short-run aggregate supply (SRAS): The short-run aggregate supply curve shows the total production of goods and services in an economy at different price levels, while some factors of production are fixed.

Potential GDP: Potential GDP is the maximum output an economy can produce without causing inflation when all resources are fully employed.

Aggregate demand (AD):

Aggregate demand is the total demand for goods and services within an economy at a given overall price level and in a given period.