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Long run aggregate supply

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Long run aggregate supply (LRAS) is a theoretical concept and refers to the output that an economy can produce when using all its factors of production, and hence when operating at full employment. Graphically, it is a vertical curve indicating that, in the long run, output is not affected by changes in the price level.

LRAS curve

Another way to consider why the long run aggregate supply curve is vertical is to consider how real output responds to changes in aggregate demand.

In the short run, and operating with spare capacity in the economy with an 'output gap', increases in aggregate demand can facilitate an expansion of aggregate supply.

LRAS with shifts in AD

However, in the long run, and assuming factors are fully employed, increased in aggregate demand cannot induce more output - rather, the effect is on the price level rather than on real output.


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