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Macroeconomics · Unit 3 · 3.4
AP Macroeconomics · National Income and Price Determination
Long-Run Aggregate Supply
LRAS is vertical at full-employment output — long-run real GDP depends on resources and technology, not the price level, so only growth shifts it.
key ideaLRAS is vertical at the economy’s full-employment output. In the long run, real GDP depends on resources and technology, not the price level — so only growth shifts LRAS.
The idea
At full employment, all resources are used at their natural rates. Because output there is set by real factors, not prices, LRAS is a vertical line at potential GDP.
LRAS is vertical at potential output (Yf). The price level can be anything, but long-run output is fixed by resources, capital, and technology — the sources of growth.Why it matters
LRASvertical line at full-employment output
Potential output (Yf)real GDP at the natural rate of unemployment
Long-run growtha rightward shift of LRAS
Money neutralitylong-run output is independent of the price level
| LRAS shifter | Effect |
|---|
| more capital or labor | LRAS shifts right |
| better technology | LRAS shifts right |
| resource depletion | LRAS shifts left |
Only changes in the economy’s productive capacity move LRAS. The price level never does — that is what ‘vertical’ means.
Worked analysis
EX 1
Explain the vertical shape
reasoningWhy does the price level not affect long-run output?
1
Long-run wages adjust
Nominal wages fully catch up to prices.
2
Real incentives unchanged
Real profit returns to normal.
3
Conclude
Output stays at potential — a vertical LRAS.
EX 2
Shift LRAS
concept applicationA country’s labor force and capital both grow. What happens to LRAS?
1
Effect on capacity
Productive capacity rises.
3
Name it
Long-run economic growth.
EX 3
Relate LRAS and the PPC
reasoningHow does a rightward LRAS shift relate to the PPC?
1
Both show capacity
LRAS and the PPC both track potential output.
2
Growth
An outward PPC matches a rightward LRAS.
3
Conclude
Both depict economic growth.
Common traps
LRAS is vertical at potential
Long-run output depends on real factors, not the price level, so LRAS is a vertical line at Yf.
Only growth shifts LRAS
More resources, capital, or technology shift LRAS right; the price level never moves it.
Full employment is not zero unemployment
At potential output, unemployment equals its natural rate — frictional plus structural.
Check yourself
Why is LRAS vertical?
Show answer
Long-run output is set by resources and technology, not the price level.
What output does LRAS sit at?
Show answer
Full-employment (potential) real GDP.
What shifts LRAS to the right?
Show answer
Economic growth — more resources, capital, or better technology.
What unemployment rate holds at potential output?
Show answer
The natural rate (frictional + structural).