An Introduction to Long-run Aggregate Supply (LRAS)
- The long-run aggregate supply (LRAS) represents the potential capacity of an economy's factors of production
- Any factor that changes the quantity or quality of a factor of production will impact the long-run aggregate supply (LRAS) of an economy
- This corresponds to an outward or inward shift of the potential output of an economy on the production possibilities diagram
Diagram: Shift in the Long-run Aggregate Supply (LRAS)
A shift is caused by a change in one of the factors that determine the long-run aggregate supply (LRAS)
- The diagram above represents the Classical Economics view of the long-run aggregate supply
- The Keynesian view is contrasted further down the page
Diagram analysis
- Using all available factors of production, the long-term output of this economy (LRAS) occurs at YFE
- At YFE, all of the resources available in the economy are fully employed (utilised)
- At YFE, the position of the vertical long-run AS curve represents the normal capacity level of output in the economy
- The economy is initially in equilibrium at the intersection of AD and LRAS1 (AP1, YFE)
- An outward shift of a country’s LRAS curve means that its productive capacity has increased
- This fundamental expansion of the economy can be seen in the shift from LRAS1 → LRAS2
- Underlying economic growth is represented by a rightward shift in the long-run AS curve
- The following factors will shift the entire LRAS curve outward and increase the potential output of the economy
- An improvement in the quality of the factors of production
- E.g. An increase in productivity (output per unit of input)
- E.g. An increase in productivity (output per unit of input)
- An increase in the quantity of the factors of production
- An improvement in the quality of the factors of production