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Long-run aggregate supply curve, explained

The LRAS curve marks an economy’s potential real GDP once wages and other prices have adjusted.

Maya Lindqvist

By Maya Lindqvist · Senior Technology Correspondent

4 min read

The long-run aggregate supply curve, or LRAS, is the vertical line in the standard AD–AS macroeconomic model that marks an economy’s potential, or full-employment, real GDP. It separates short-run changes in spending and prices from changes in how much the economy can sustainably produce.

“Long run” is not a set number of months or years. In macroeconomics, it means enough time for nominal wages and other input prices to adjust to a change in the overall price level.

How to read the long-run aggregate supply curve

The vertical axis shows the price level and the horizontal axis shows real GDP. LRAS stands at potential output: the real GDP an economy produces when it uses its factors of production efficiently.

The curve is vertical because the standard model treats potential output as independent of the price level once prices and wages have fully adjusted. A price-level change moves up or down the same LRAS line; its real-GDP position stays fixed.

At potential output, the unemployment rate equals the natural rate of unemployment. That is why full-employment output and potential output are used as names for the same concept in this model.

What determines potential output

Potential output reflects productive capacity. An aggregate production function links total output to employment while capital, natural resources and technology are held unchanged; in the standard account, natural employment maps to potential real GDP and fixes the position of LRAS.

The quantity and quality of resources, and how they are combined to produce output, affect that capacity. Improvements in technology, a larger capital stock or greater natural-resource availability can raise potential output.

Movement along the curve or a shift?

Start by asking whether an event changes the price level or changes productive capacity. The distinction determines whether LRAS moves or shifts.

  • A price-level change: moves up or down the vertical LRAS line. Potential real GDP is unchanged in the model.
  • A change in aggregate demand: can move actual output away from potential in the short run, but does not by itself shift LRAS.
  • Better technology, more capital or greater natural-resource availability: shift LRAS right because potential output rises.
  • A damaging real shock: can shift LRAS left if it reduces productive capacity. Droughts, oil-supply changes, hurricanes and wars are examples of shocks that can affect production conditions.

A rightward shift represents an increase in potential output, often described as economic growth. A leftward shift represents lower potential output.

LRAS and short-run aggregate supply

Short-run aggregate supply, or SRAS, is usually upward sloping. Some input prices are sticky in the short run, so producers may change output when the price level changes.

LRAS assumes wages and other input prices have adjusted. Under that assumption, capacity changes appear as shifts of LRAS rather than movements along the curve.

A recessionary gap in the model

Suppose potential output is $1 trillion in real GDP, so LRAS is drawn at $1 trillion. If aggregate demand falls and short-run equilibrium output is $950 billion, the $50 billion difference is a recessionary gap: actual output is below potential output.

In the model’s self-correction account, weaker conditions eventually lower wages and other resource prices, shifting SRAS right and returning output toward potential. An inflationary gap is the reverse case: actual output temporarily exceeds potential, followed in the model by higher wages and resource prices that shift SRAS left.

The adjustment period is not fixed and wages may adjust slowly. A 2001 scholarly critique also argued that vertical LRAS had received limited empirical testing and reported that its own four-year specification was unsupported; that was a critique of a particular test, not a general verdict on the framework.

A quick diagnosis for graph questions

  1. Find LRAS first. It marks potential real GDP.
  2. Identify the event: a spending change, a price-level change or a change in productive capacity.
  3. For a spending shock, look for a short-run gap between actual GDP and LRAS.
  4. For a capacity change, shift LRAS right or left.

The key rule is that a price-level change alone moves along LRAS, while a change in resources, technology or other production conditions changes where the vertical line stands.

Frequently asked questions

What causes the long-run aggregate supply curve to shift?

LRAS shifts when potential output changes. Improvements in technology, a larger capital stock or greater natural-resource availability can shift it right, while adverse real shocks that reduce productive capacity can shift it left.

What is the difference between long-run and short-run aggregate supply?

SRAS is generally upward sloping because some wages and other input prices are slow to adjust, so output can change with the price level. LRAS is vertical in the standard model because, once prices and wages are fully flexible, potential real GDP depends on productive resources and technology rather than the price level.

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