LRAS Curve

Definition

The LRAS (Long-Run Aggregate Supply) curve represents the relationship between the price level and the quantity of output supplied in the long run, when all factors of production can be adjusted. It depicts the economy's productive capacity and shows the maximum level of real GDP that can be produced at each price level.

5 Must Know Facts For Your Next Test

1. The LRAS curve is vertical, indicating that the quantity of output supplied is independent of the price level in the long run.
2. The position of the LRAS curve is determined by the economy's productive capacity, which is influenced by factors such as the size and quality of the labor force, the stock of capital, technology, and the efficiency of resource allocation.
3. Shifts in the LRAS curve represent changes in the economy's productive capacity, which can be caused by changes in the factors of production or improvements in productivity.
4. The LRAS curve is relevant in the context of the aggregate demand and aggregate supply model, as it helps explain the long-run behavior of the economy and the determination of the equilibrium price level and real GDP.
5. Movements along the LRAS curve are caused by changes in the price level, while shifts in the LRAS curve are caused by changes in the economy's productive capacity.

Review Questions

• Explain how the LRAS curve is related to the concept of the economy's productive capacity.
  • The LRAS curve represents the economy's productive capacity, which is the maximum level of real GDP that can be produced at each price level in the long run. The position of the LRAS curve is determined by factors such as the size and quality of the labor force, the stock of capital, technology, and the efficiency of resource allocation. Shifts in the LRAS curve indicate changes in the economy's productive capacity, which can be caused by changes in these underlying factors.
• Describe the relationship between the LRAS curve and the short-run aggregate supply (SRAS) curve.
  • The LRAS curve is vertical, indicating that the quantity of output supplied is independent of the price level in the long run. In contrast, the SRAS curve is upward-sloping, reflecting 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. While the SRAS curve can shift due to changes in input prices or productivity, the LRAS curve shifts only when there are changes in the economy's productive capacity, such as changes in the factors of production or improvements in technology.
• Analyze how shifts in the LRAS curve can impact the equilibrium price level and real GDP in the aggregate demand and aggregate supply model.
  • In the aggregate demand and aggregate supply model, shifts in the LRAS curve represent changes in the economy's productive capacity. If the LRAS curve shifts to the right, indicating an increase in the economy's productive capacity, this will lead to a lower equilibrium price level and a higher level of real GDP in the long run. Conversely, if the LRAS curve shifts to the left, reflecting a decrease in the economy's productive capacity, this will result in a higher equilibrium price level and a lower level of real GDP in the long run. These changes in the equilibrium price level and real GDP are driven by the changes in the economy's ability to produce goods and services, as depicted by the LRAS curve.

Related terms

Aggregate Demand: The total demand for all final goods and services in an economy at a given price level and time period.

Aggregate Supply: The total supply of all final goods and services in an economy at a given price level and time period.

Short-Run Aggregate Supply (SRAS) Curve: The SRAS curve shows 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.