AP Macroeconomics · Unit 3 · Topic 3.4

The Long-Run Aggregate Supply Study Lab

Long-run aggregate supply (LRAS) shows how much real GDP the economy produces once every price and wage has adjusted. It is a vertical line at full-employment output, and it moves only when the economy's resources or technology change. Use the lab to shift the PPC and LRAS together, then switch between the short run and the long run to see why LRAS ignores the price level.

1. Linked graphs: PPC and AD–AS

Both graphs describe the same economy. Dashed grey lines show where it started (full-employment output Yf = 100, price level 100, unemployment at a natural rate of 5%). Solid lines show where it is now.

Production possibilities curve capital vs. consumer goods

AD–AS model price level vs. real GDP

PPC / LRASSRASADStarting position

Try a scenario

Resources and technology (shift the PPC and LRAS)

Labor force Number of workers available

Physical capital Factories, machines, tools

Human capital Education, skills, training

Natural resources Land, minerals, energy supplies

Technology Better ways to combine inputs

Aggregate demand Spending changes. Not a resource, so it never moves LRAS.

Time horizon

Full-employment output (Yf)

100.0

Real GDP

100.0

Price level

100.0

Unemployment rate (natural rate 5%)

5.0%

2. Key ideas

Definition

Long-run aggregate supply

LRAS is a vertical line at full-employment output (Yf). It shows that in the long run the amount of real GDP the economy produces does not depend on the price level.

Why vertical

Every price adjusts

In the long run, nominal wages and other input prices have time to catch up with the price level. If all prices and wages rise 10%, firms' real costs and real revenues are unchanged, so they produce the same amount. Output depends on resources and technology, not on the price level.

Full-employment output

Also called potential output. It is the real GDP the economy produces when it uses its resources at normal, sustainable rates. Real GDP below Yf is a recessionary gap; above Yf is an inflationary gap.

u = frictional + structural

Natural rate of unemployment

At full employment, unemployment is not zero. It equals the natural rate: frictional plus structural unemployment, with zero cyclical unemployment. In a recessionary gap, cyclical unemployment pushes the rate above the natural rate.

PPC link

Same idea, two graphs

A point on the PPC matches output at LRAS: full employment. A point inside the PPC matches a recessionary gap: idle workers and machines. An outward PPC shift matches LRAS shifting right.

Shifters

What moves LRAS

Changes in the quantity or quality of resources (labor, physical capital, human capital, natural resources) and changes in technology. A change in the price level, in AD, or in input prices does not shift LRAS.

3. Does it shift LRAS? Cheat sheet

Memorize the pattern: if the economy's capacity to produce changes, the PPC and LRAS move together. If only spending or prices change, they stay put.

Event	PPC	LRAS	Full-employment output (Yf)
Labor force grows (more working-age people, immigration)	Shifts outward	Right	↑
Firms invest in new factories and equipment	Shifts outward	Right	↑
Workers gain education and training (human capital)	Shifts outward	Right	↑
Discovery of new natural resources	Shifts outward	Right	↑
Improvement in technology	Shifts outward	Right	↑
Natural disaster or war destroys capital	Shifts inward	Left	↓
Consumer or business pessimism (AD falls)	No shift; point moves inside	No shift	No change (recessionary gap in the short run)
Nominal wages or other input prices rise	No shift	No shift (SRAS shifts left)	No change
The price level rises	No shift	No shift (movement along AD and SRAS)	No change

4. Drawing it on the FRQ

Labels that earn points

Vertical axis: Price level. Horizontal axis: Real GDP (or Real output). Never "Quantity" or "Price."
Draw LRAS as a vertical line and label Yf where it meets the horizontal axis.
To show growth, draw LRAS₂ to the right of LRAS₁, add an arrow, and label the new full-employment output Yf₂.
On a PPC, label both axes with goods (for example, Capital goods and Consumer goods). Show growth with an outward shift labeled PPC₂. Show unemployment with a point inside the curve.
When asked why LRAS is vertical, write: "In the long run, nominal wages and all other prices fully adjust, so real output depends on resources and technology, not on the price level."
For a recessionary gap, mark real GDP (Y₁) to the left of Yf and say unemployment is above the natural rate.

Common mistakes

Shifting LRAS when AD changes. A change in spending moves the economy along or away from LRAS; LRAS stays at Yf.
Saying full employment means 0% unemployment. At Yf, unemployment equals the natural rate.
Showing a recession as an inward PPC shift. A recession is a point inside the PPC; the economy's capacity has not changed.
Shifting LRAS for a change in nominal wages or oil prices. Input prices shift SRAS.
Drawing LRAS with a slope. It is vertical because output in the long run does not respond to the price level.
Mixing up the natural rate with cyclical unemployment. Cyclical unemployment is zero at Yf.

5. Practice questions

AP-style multiple choice. Pick an answer to see the explanation.

0 / 0 correct

6. Key terms

The vocabulary for topic 3.4. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 3 terminology guide.