Ever wondered how production in an economy is analyzed? Surely, this must be too difficult a task, considering that there are just too many things being produced in an economy. Well, economists have a way of simplifying things, and they do this through aggregate supply. This time, we are concerned with how economists illustrate aggregate supply in the long run, using the long-run aggregate supply curve. It shows how the price interacts with the real Gross Domestic Product (GDP) in an economy. Want to learn how price interacts with the real GDP in an economy and what are the factors that influence the long-run aggregate supply curve? What is the difference between SRAS and LRAS? Read on to find out! W
Long-Run Aggregate Supply Curve Meaning
Let's briefly introduce the long-run concept to help provide the meaning of the long-run aggregate supply curve.
Economists conduct macroeconomic analysis by taking two main periods into consideration, and these are the short run and the long run. The short run is the period when some production costs and output prices are fixed. On the other hand, the long run is the period when all production costs, as well as output prices, are flexible.
The aggregate supply curve is the graphical illustration of the relationship between the aggregate price level and the real GDP. The long-run aggregate supply curve is just the supply curve, but for the period when output prices and all production costs are flexible!
The short run is the period when output prices and some production costs are fixed.
The long run is the period when output prices and all production costs are flexible.
The aggregate supply curve is the graphical illustration of the relationship between the aggregate price level and the real GDP.
The long-run aggregate supply curve is the graphical illustration of the relationship between the aggregate price level and the real GDP in the long run.
It is important to note that the short run and long run are not necessarily time limits. Rather, they are just as they are defined; when some costs of production remain unchanged, we are in the short run - and all costs of production change, we are in the long run. So, the long run comes after the short run, and this could range from a few weeks to many years. It is also important to note that both input prices and output prices are flexible in the long run.
The Slope and Position of the Long-Run Aggregate Supply Curve
Here, we will draw and show the slope and position of the long-run aggregate supply curve. The long-run aggregate supply curve has an upward vertical slope. We will explain why it is vertical, but first, let's draw the graph as seen in Figure 1.
Fig. 1 - Long-run aggregate supply curve
We plot the price level on the vertical axis and the real GDP on the horizontal axis. As shown in Figure 1, the long-run aggregate supply curve has a vertical slope. Why is this? The answer is that there can only be one output level in the long run, and this is the full-employment output or real GDP. But why again? Well, both input prices and output prices are flexible in the long run. This means that even when the prices of outputs rise and firms want to produce more, the price level for inputs will also rise to a point where producers are motivated to produce at the full-employment output level. This means that the position of the long-run aggregate supply curve is always the full-employment output level. Here is an example.
Let's consider an economy where there is only one firm that produces coffee. This economy is in the long run where it is producing the full-employment output level. An increase in the price of coffee creates a situation where the firm wants to produce beyond full employment. This means workers must work overtime. The high demand for workers will also increase the cost of wages. This means the profits of the firm will begin to drop. Eventually, the profits will drop until they reach the original full-employment output level.
As broken down in the example above, even if prices change, aggregate supply will remain at the full-employment real output or real GDP level in the long run.
So, the vertical slope of the long-run aggregate supply curve is because, at every possible price level on the vertical axis, the economy will be producing at the full-employment output level on the horizontal axis.
Factors that Influence the Long-Run Aggregate Supply Curve
There are some factors that influence the long-run aggregate supply curve and cause it to shift. The long-run aggregate supply curve is always at the full-employment output level. So, what causes it to shift to a new full-employment output level? The answer is - changes in labor, capital, natural resources, and technology. These are factors that change the full-employment output level.
- Changes in labor, capital, natural resources, and technology shift the long-run aggregate supply curve.
For instance, more employees in an economy will increase the full-employment output level. More machines in an economy will increase the full-employment output level. Newer technology that enables workers to work faster will increase the full-employment output level.
Anyway, what does a shift in the long-run aggregate supply curve look like? Figure 2 shows this.
Fig. 2 - Shifts in the long-run aggregate supply curve
As shown in Figure 2, a change that reduces the full-employment output level will shift the long-run aggregate supply curve to the left (from Y1 to Y2), whereas a change that increases the full-employment output level will shift the long-run aggregate supply curve to the right (from Y1 to Y3). Now, let's explain how changes in labor, capital, natural resources, and technology influence the long-run aggregate supply curve.
How changes in labor influence the long-run aggregate supply curve
Changes in labor influence the long-run aggregate supply curve by increasing or decreasing the full-employment output.
For instance, if an economy sees an influx of expatriates, there would be more people available to employ, and this would mean that full employment is now higher than before. Likewise, if workers leave the same economy to look for work in foreign economies, then that economy's full employment would be lower.
An increase in labor shifts the long-run aggregate supply curve to the right, whereas a decrease in labor shifts the long-run aggregate supply curve to the left.
How changes in capital influence the long-run aggregate supply curve
Changes in capital alter the productivity of the economy. As a factor of production or an input, capital gives the economy the ability to produce more; hence the full-employment output increases with an increase in capital.
Imagine a single firm economy that produces only coffee. The firm adds three new harvesters to its inventory. This enables the economy to produce 50 more bags of coffee using the same quantity of labor and other inputs.
From the above example, the increase in capital will result in a rightward shift of the long-run aggregate supply curve. Should there be a reduction in capital, there will be a leftward shift of the long-run aggregate supply curve.
How changes in natural resources influence the long-run aggregate supply curve
Natural resources increase the productivity of an economy by contributing in the form of an added input.
For example, a country that is rich in crude oil will have a higher output in fuel products compared to other countries that do not have crude oil in abundance.
An increase in natural resources will shift the long-run aggregate supply curve to the right, whereas a decrease in natural resources will shift the long-run aggregate supply curve to the left.
How changes in technology influence the long-run aggregate supply curve
Technological advancements provide easier ways of doing the same things. These easier ways of doing things mean that the same number of workers can now produce more output.
For instance, in an economy that used to transport goods using horses, the invention of cars that are 10 times faster than horses means that the economy can now be more productive.
Technological advancements shift the long-run aggregate supply curve to the right. Unlike other factors, a decrease in technology is hardly realistic. Therefore, technological changes always result in an increase in aggregate supply.
Difference between SRAS and LRAS
The main difference between the short-run aggregate supply (SRAS) and the long-run aggregate supply (LRAS) is that both output and input prices are fixed in the short run, whereas both output and input prices are flexible in the long run.
- The SRAS curve shifts as a result of changes in input prices, whereas the LRAS curve remains at the full-employment output level even when input prices change.
- There is a temporary increase in the level of output when the price increases in the case of the SRAS. However, the level of output remains at the full-employment level in the case of the LRAS.
The Keynesian view of the long-run aggregate supply is different and shows that the curve can have an upward slope, as shown in Figure 3 below.
Fig. 3 - Keynesian Long-Run Aggregate Supply Curve
The Keynesian view suggests that the economy can still be below full employment even in the long run. The Keynesian long-run aggregate supply curve starts off horizontal because, at low levels of output and employment, the economy has spare or unused production capacity. Therefore, the economy can increase output at no additional cost. However, once the economy reaches full employment, the long-run aggregate supply curve transitions into a vertical curve, as it is impossible to increase output at this point without purely affecting the price level.
Read our articles on the AD-AS Model and Aggregate Supply and Demand to learn more!
The Long-Run Aggregate Supply Curve - Key takeaways
- The aggregate supply curve is the graphical illustration of the relationship between the aggregate price level and the real GDP.
- The long-run aggregate supply curve is the graphical illustration of the relationship between the aggregate price level and the real GDP in the long run.
- Changes in labor, capital, natural resources, and technology shift the long-run aggregate supply curve.
- An increase in the factors that influence the long-run aggregate supply curve causes it to shift to the right, whereas a decrease causes it to shift to the left.
- The main difference between the short-run aggregate supply (SRAS) and the long-run aggregate supply (LRAS) is that the short-run aggregate supply looks at the short run, whereas the long-run aggregate supply looks at the long run.
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