Long-Run Aggregate Supply (LRAS)
Introduced| English | Meaning |
|---|---|
| long-run aggregate supply/lɒŋ rʌn ˈæɡrɪɡeɪt səˈplaɪ/ | The total output an economy can sustainably produce when resources and prices have fully adjusted. |
| full-employment output/fʊl emˈplɔɪmənt ˈaʊtpʊt/ | The sustainable level of real output when unemployment is at its natural rate, including frictional and structural unemployment. |
| frictional/ˈfrɪkʃənl/ | Describing unemployment that occurs while people search for jobs or move between jobs. |
| structural/ˈstrʌktʃərəl/ | Describing unemployment caused by a mismatch between workers' skills or locations and the jobs available. |
| natural rate of unemployment/ˈnætʃərəl reɪt ɒv ʌnemˈplɔɪmənt/ | The unemployment rate associated with normal frictional and structural unemployment when the economy has no cyclical unemployment. |
| potential GDP/pəˈtenʃl ˌdʒiː diː ˈpiː/ | The level of output an economy can sustainably produce when its resources are employed at normal capacity. |
| fully flexible/ˈfʊli ˈfleksɪbl/ | Describing prices or wages that can adjust to changed market conditions without the rigidity assumed in short-run models. |
| capacity/kəˈpæsɪti/ | The amount of output an economy or producer can produce with its available resources and technology under specified operating conditions. |
| capital stock/ˈkæpɪtl stɒk/ | The accumulated productive assets, such as machinery and buildings, available for producing goods and services. |
| technology/tekˈnɒlədʒi/ | The application of knowledge, methods and tools to practical tasks. |
| economic growth/ˌiːkəˈnɒmɪk ɡrəʊθ/ | An increase in an economy's real output of goods and services over time. |
The economy's real ceiling
- Contracts don't stay fixed forever — given time, every wage and price adjusts.
- In that long run, the sticky-wage story disappears.
- Aggregate supply then looks completely different.
- It becomes the long-run aggregate supply 长期总供给 (LRAS) curve — and it is vertical.
Vertical at full-employment output
- LRAS is a vertical line at the economy's full-employment output 充分就业产出.
- This is not zero unemployment — only frictional 摩擦性失业 and structural 结构性失业 remain, at the natural rate of unemployment 自然失业率.
- Its position marks the economy's potential GDP 潜在GDP — the maximum sustainable output.
The AD-AS model
LRAS is vertical at potential output, because in the long run wages and prices are flexible. Economic growth shifts it right.
The long-run aggregate supply curve is:
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In the long run output depends on real resources, not the price level, so LRAS is vertical.
LRAS sits at the economy's maximum sustainable output, called potential ______.
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Potential GDP is the output at full employment, at the natural rate of unemployment.
Full-employment output means zero unemployment.
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Some frictional and structural unemployment always remain — the natural rate.
Why it's independent of the price level
- In the long run, wages and prices are fully flexible 完全灵活.
- If the price level doubles, wages eventually double too, so firms have no lasting reason to change output.
- Real output settles back to what the economy's real resources can make.
- That does not depend on how high the price tags are — so LRAS is vertical.
LRAS is independent of the price level because, in the long run:
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If the price level doubles, wages eventually double too, leaving real output unchanged.
Growth shifts LRAS right
- LRAS moves only when real productive capacity 生产能力 changes.
- More or better resources, a bigger capital stock 资本存量, or new technology 技术 all shift LRAS right.
- That rightward shift is long-run economic growth 经济增长.
- Worked idea. A decade of investment in schools and factories raises potential output — LRAS shifts right.
A country invests heavily in education and new factories for a decade. LRAS:
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More capital and a more skilled workforce raise potential output, shifting LRAS right.
Select all that shift LRAS to the right.
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Real resources and technology grow potential output; a price-level change does not move LRAS.
LRAS is vertical at full-employment output (potential GDP), because wages and prices are fully flexible in the long run — real output depends on real resources, not the price level. Economic growth shifts LRAS right.
Write from a new potential output of 1100
- A decade of schooling and new factories raises potential output from 1000 to 1100.
- Say what happens to long-run aggregate supply.
Schooling and new factories raise potential output from 1000 to 1100. What happens to the long-run aggregate supply curve, and why does the price level not set that output?
More capital and skills raise what the economy can produce.
What happens to long-run aggregate supply?
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Potential output rose from 1000 to 1100, a rightward shift.