LRAS, or Long-Run Aggregate Supply, represents the total supply of goods and services that an economy can produce in the long run when all factors of production are utilized at their full potential. It is a vertical line on a graph representing potential output.
Imagine LRAS as a marathon runner's maximum speed. No matter how fast or slow they start, eventually they will reach their maximum potential speed. Similarly, LRAS shows us what an economy is capable of producing when all resources are fully employed.
Potential Output: Potential output refers to the level of real GDP an economy can achieve when operating at full employment.
Aggregate Demand (AD): Aggregate demand represents total spending on goods and services within an economy at different price levels.
Short-run Aggregate Supply (SRAS): SRAS shows the relationship between price levels and quantity supplied in the short run, considering factors such as input prices and productivity.
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