LRAS

Definition

LRAS, or the Long-Run Aggregate Supply, refers to the total quantity of output that all firms in an economy are willing and able to produce in the long run, given the existing technology, resources, and economic conditions. It represents the economy's potential output or full-employment level of output.

5 Must Know Facts For Your Next Test

1. The LRAS curve is vertical, indicating that output is not affected by changes in the price level in the long run.
2. The LRAS represents the economy's full-employment level of output, which is the maximum sustainable output that can be produced with the existing technology, resources, and economic conditions.
3. Factors that can shift the LRAS curve include changes in the quantity or quality of resources, changes in technology, and changes in the institutional and legal environment.
4. The intersection of the AD and LRAS curves determines the long-run equilibrium price level and output level in the economy.
5. The LRAS curve is a key component of the Aggregate Demand-Aggregate Supply (AD-AS) model, which is used to analyze the determination of the overall price level and real output in the economy.

Review Questions

• Explain the relationship between the LRAS curve and the economy's full-employment level of output.
  • The LRAS curve represents the economy's potential or full-employment level of output, which is the maximum sustainable output that can be produced with the existing technology, resources, and economic conditions. The LRAS curve is vertical, indicating that output is not affected by changes in the price level in the long run. The intersection of the AD and LRAS curves determines the long-run equilibrium price level and output level in the economy.
• Describe the factors that can shift the LRAS curve and explain how these shifts affect the economy's long-run equilibrium.
  • Factors that can shift the LRAS curve include changes in the quantity or quality of resources (such as labor, capital, or natural resources), changes in technology, and changes in the institutional and legal environment. An increase in the quantity or quality of resources, or an improvement in technology, would shift the LRAS curve to the right, leading to a higher level of potential output and a lower long-run equilibrium price level. Conversely, a decrease in resources or a deterioration in technology would shift the LRAS curve to the left, resulting in a lower level of potential output and a higher long-run equilibrium price level.
• Analyze the role of the LRAS curve in the Aggregate Demand-Aggregate Supply (AD-AS) model and explain how it can be used to understand the long-run behavior of the economy.
  • The LRAS curve is a key component of the AD-AS model, which is used to analyze the determination of the overall price level and real output in the economy. The LRAS curve represents the economy's potential or full-employment level of output, and its vertical shape indicates that output is not affected by changes in the price level in the long run. The intersection of the AD and LRAS curves determines the long-run equilibrium price level and output level in the economy. By understanding the factors that can shift the LRAS curve, such as changes in resources, technology, and the institutional environment, the AD-AS model can be used to predict how the economy will behave in the long run and the effects of various economic policies on the overall price level and output.

Related terms

Aggregate Supply: Aggregate Supply (AS) is the total quantity of goods and services that firms are willing to sell at different price levels in an economy.

Aggregate Demand: Aggregate Demand (AD) is the total quantity of goods and services that households, businesses, the government, and foreign buyers are willing to buy at different price levels in an economy.

Short-Run Aggregate Supply: Short-Run Aggregate Supply (SRAS) is the relationship between the quantity of real output supplied and the price level in the short run, assuming that at least one factor of production is fixed.