LRAs

Long-run aggregate supply (LRAS) represents the maximum quantity of goods and services an economy can produce when its resources are fully employed and technology is used efficiently, given existing institutional and policy frameworks. In most standard macroeconomic models, LRAS is depicted as a vertical line at the economy’s potential or natural level of real GDP. Because wages and prices adjust over the long run, increases in the price level do not change the economy’s output in the long run; instead, prices adjust to balance aggregate demand and supply.

LRAS is determined by factors that affect potential output: the size and quality of the labor force (employment, demographics, human capital), the stock and productivity of capital, technology, infrastructure, natural resources, and institutions that affect incentives and efficiency. Shifts occur when these fundamentals change, such as through investment in capital, population growth, improvements in technology, education, or policy reforms that enhance productivity.

In contrast, the short-run aggregate supply (SRAS) is affected by price and cost in the short term and is typically upward-sloping. In macroeconomic analysis, the long-run equilibrium occurs at the intersection of aggregate demand (AD) and the LRAS, where the economy operates at potential GDP and unemployment is at its natural rate. Policy debates around LRAS focus on growth and potential output, including supply-side policies, innovation, and structural reforms, rather than on demand management alone.