Long-Run Aggregate Supply Curve

Definition

The long-run aggregate supply curve represents the relationship between the overall price level and the total quantity of output supplied in an economy over the long run, when all factors of production can be adjusted. It reflects the economy's productive capacity and is generally vertical, indicating that the quantity of output supplied is not sensitive to 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 generally vertical, indicating that the quantity of output supplied is not sensitive to changes in the price level in the long run.
2. The position of the long-run aggregate supply curve is determined by the economy's productive capacity, which is influenced by factors such as the available labor force, capital stock, and technology.
3. Increases in the economy's productive capacity, such as through technological advancements or an expansion of the labor force, will shift the long-run aggregate supply curve to the right.
4. In the long run, the economy will always return to its full-employment level of output, as wages and prices adjust to clear the market.
5. The long-run aggregate supply curve is an important concept in the Keynesian-Neoclassical synthesis, as it represents the economy's potential output in the long run.

Review Questions

• Explain how the long-run aggregate supply curve differs from the short-run aggregate supply curve.
  • The key difference between the long-run and short-run aggregate supply curves is the flexibility of factors of production. In the short run, at least one factor of production is fixed, such as the capital stock, which limits the economy's ability to adjust to changes in demand. As a result, the short-run aggregate supply curve is upward-sloping, reflecting the law of diminishing returns. In the long run, however, all factors of production can be adjusted, and the economy can reach its full productive capacity. This is reflected in the long-run aggregate supply curve, which is generally vertical, indicating that the quantity of output supplied is not sensitive to changes in the price level.
• Describe how changes in the economy's productive capacity affect the long-run aggregate supply curve.
  • The position of the long-run aggregate supply curve is determined by the economy's productive capacity, which is influenced by factors such as the available labor force, capital stock, and technology. Increases in the economy's productive capacity, such as through technological advancements or an expansion of the labor force, will shift the long-run aggregate supply curve to the right. This means that the economy can produce a greater quantity of output at any given price level in the long run. Conversely, a decrease in productive capacity, such as through a decline in the labor force or a reduction in capital investment, will shift the long-run aggregate supply curve to the left.
• Explain the role of the long-run aggregate supply curve in the Keynesian-Neoclassical synthesis and how it relates to the economy's potential output.
  • The long-run aggregate supply curve is a crucial concept in the Keynesian-Neoclassical synthesis, as it represents the economy's potential output in the long run. In this framework, the long-run aggregate supply curve is vertical, indicating that the economy will always return to its full-employment level of output, as wages and prices adjust to clear the market. This is in contrast to the Keynesian view, which emphasizes the role of aggregate demand in determining the level of output in the short run. The Keynesian-Neoclassical synthesis recognizes that both aggregate demand and aggregate supply factors play important roles in determining the economy's overall performance, with the long-run aggregate supply curve representing the economy's productive capacity and potential output.

Related terms

Aggregate Supply: The total quantity of goods and services that firms are willing to sell at different price levels in the economy.

Short-Run Aggregate Supply Curve: The relationship between the price level and the quantity of output supplied in the short run, when at least one factor of production is fixed.

Productive Capacity: The maximum level of output an economy can sustain given its available resources and technology.