Long-run aggregate supply

Definition

Long-run aggregate supply (LRAS) refers to the total output of goods and services an economy can produce when utilizing all available resources efficiently, at full employment, and when prices are flexible. Unlike short-run aggregate supply, which can fluctuate due to temporary factors, the long-run aggregate supply is determined by the economy's productive capacity and is vertical at the natural level of output, indicating that output is not affected by changes in the price level in the long run.

5 Must Know Facts For Your Next Test

1. The long-run aggregate supply curve is vertical, indicating that changes in price levels do not affect the quantity of goods and services produced in the long run.
2. Factors that shift the LRAS curve include technological advancements, changes in resources, and improvements in productivity.
3. In the long run, all resources are fully utilized; thus, unemployment returns to its natural rate as the economy adjusts to any shocks.
4. Long-run aggregate supply is crucial for understanding economic growth since it reflects an economy's capacity to produce goods and services over time.
5. An increase in LRAS typically signals a healthy growing economy, as it indicates improvements in productivity or an expansion of productive resources.

Review Questions

• How does long-run aggregate supply differ from short-run aggregate supply in terms of responsiveness to price changes?
  • Long-run aggregate supply remains unaffected by price changes because it reflects the economy's full production capacity at full employment. In contrast, short-run aggregate supply can be influenced by temporary factors such as resource costs and demand fluctuations. The vertical nature of LRAS means that even with rising prices, the quantity of goods and services produced remains constant in the long run.
• Discuss the significance of shifts in the long-run aggregate supply curve and what factors might cause such shifts.
  • Shifts in the long-run aggregate supply curve indicate changes in an economy's productive capacity. Factors such as technological advancements, increases in labor or capital resources, and improvements in productivity can cause rightward shifts, signaling growth. Conversely, a leftward shift might occur due to natural disasters or significant declines in available resources. Understanding these shifts helps economists assess long-term economic health and potential for growth.
• Evaluate how an increase in long-run aggregate supply impacts overall economic growth and stability.
  • An increase in long-run aggregate supply enhances economic growth by enabling higher levels of output without triggering inflation. This shift indicates improvements in productivity or resource availability, fostering a more robust labor market and higher standards of living. Additionally, stable LRAS promotes confidence among investors and consumers as it signals a healthy economy capable of sustaining growth over time, ultimately leading to greater economic stability.

Related terms

Short-run aggregate supply: Short-run aggregate supply (SRAS) refers to the total output produced by an economy in the short term, where prices are sticky and production can be adjusted based on demand fluctuations.

Natural rate of unemployment: The natural rate of unemployment is the level of unemployment that exists when the economy is at full employment, representing the frictional and structural unemployment that occurs even in a healthy economy.

Potential output: Potential output is the maximum level of economic output that an economy can sustain over the long term without leading to inflation, reflecting its long-term growth potential.