Long-Run Aggregate Supply (LRAS)

Definition

The term long-run aggregate supply refers to the total of all goods and services that businesses in a nation can sell when not constrained by time. Long-run aggregate supply is typically illustrated as a vertical line, reflecting the inelastic relationship between price and quantity of goods and services supplied.

Explanation

Also referred to as domestic final supply, aggregate supply is the total amount of goods and services that an economy can sell at a specific point in time. The aggregate supply curve is upward sloping because the cost of inputs is typically fixed in the short run, and as output increases excess production capacity is exhausted. Long-run aggregate supply (LRAS) is not a function of price. In the long run, an economy will produce a given quantity of goods and services regardless of price.

long run aggregate supplyIn the long run, companies can add new capacity, or capital, to increase production; they also have the flexibility to adjust wages. New technologies can also be introduced to increase process efficiency. As shown in the accompanying illustration, the short-run aggregate supply curve has a positive slope. As businesses in an economy approach the capacity of their factories and workforce, the curve is nearly vertical.

The long-run aggregate supply (LRAS) curve is perfectly vertical. It represents the real gross domestic product (GDP) of a nation, which is too large to be affected by price. For this reason, the LRAS curve is vertical, reflecting the inelastic relationship between supply and price.

Related Terms

short-run aggregate supplybusiness cycleaggregate supply, aggregate demand