3.4 Long-Run Aggregate Supply

What is LRAS?

The long-run aggregate supply (LRAS) curve shows the total output an economy produces when all prices, including wages, are fully flexible and have adjusted. LRAS is a vertical line at the full-employment (potential) output, meaning long-run output depends only on the quantity and quality of resources and technology, not the price level.

Why LRAS is vertical

In the long run, input prices (like wages) adjust to changes in the price level, so changes in the price level do not affect real output. If prices rise, wages eventually rise too, leaving real profits and output unchanged. This differs from SRAS, which is upward-sloping because wages/input prices are temporarily sticky.

Shifting LRAS

LRAS shifts only with changes in an economy's productive capacity: changes in the quantity/quality of labor, capital, natural resources, or technology. Increases shift LRAS rightward (economic growth); decreases shift it leftward. Price level changes alone never shift LRAS — they only cause movement in SRAS/AD equilibrium.

Key terms

Long-Run Aggregate Supply (LRAS)

A vertical curve at potential output showing that in the long run, real output doesn't depend on the price level.

Why is LRAS vertical?

Because wages and input prices fully adjust in the long run, so price level changes don't affect real output.

Potential (full-employment) output

The level of real GDP an economy produces when resources are fully and efficiently employed; where LRAS is located.

What shifts LRAS?

Changes in quantity/quality of labor, capital, natural resources, or technology — i.e., changes in productive capacity.

LRAS vs SRAS

SRAS is upward-sloping due to sticky wages/prices; LRAS is vertical because all prices fully adjust in the long run.

Try an AP-style question

Why is LRAS vertical?

1. Nominal wages never change over time
2. Long-run output doesn't depend on prices
3. Aggregate demand is fixed in the long run
4. Prices stay fixed forever in the long run