Long-run aggregate supply

LRAS

Shows total planned output when both prices and average wage rates can change. It is also a measure of a country’s potential output

Why is the LRAS curve vertical?

In the long-run, it is more difficult for firms to increase their output once they have reached maximum capacity.

LRAS and PPF

Both highlight whether the factors of production are fully employed

LRAS and output gaps

Production below the LRAS curve highlights a negative output gap and therefore an underemployment of resources

LRAS and full capacity in the economy

Full capacity means that all factors of production are being used effectively, full capacity is also shown by the LRAS curve

What determines the LRAS curve?

• Technology

• Productivity

• Worker attitudes

• Entrepreneurs and enterprise

• Factor mobility

• Economic incentives