The Long Run Aggregate Supply Curve

The long-run aggregate supply curve represents the maximum sustainable level of real GDP when resources are fully employed. It occurs after all input markets have reached equilibrium and prices have fully adjusted.

In the long run, output is not affected by the price level. Instead, it depends on resources, technology, and productivity.

On the graph, the LRAS curve is a vertical line at the level of potential output. This shows that even if prices change, output stays the same.

For example, imagine if the price level across the entire economy doubles. Eventually, workers and suppliers demand double the wages and prices for materials to keep up with the cost of living.

Since manufacturers are paying double for their inputs while selling their goods for double the price, their real profit margins remain unchanged.

As a result, firms lack incentives to exceed normal capacity, as real earnings remain unchanged, keeping production at the full-employment level.

This is why the LRAS curve is vertical. It reflects the economy’s efficient, sustainable level of output, which remains stable regardless of inflation or price changes.