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Long-Run Aggregate Supply (LRAS)

Definition

LRAS represents the total amount of goods and services an economy can produce when all resources are fully utilized, and prices have adjusted to their long-run equilibrium levels. It is a vertical line on the aggregate supply curve.

Analogy

Think of LRAS as the maximum capacity of a factory that operates at full efficiency with all its machines running smoothly. Just like how the factory can only produce a certain amount of goods at its maximum capacity, LRAS shows the maximum output an economy can achieve in the long run.

Related terms

Short-Run Aggregate Supply (SRAS): SRAS represents the total amount of goods and services an economy can produce in the short run when some resources are underutilized or not fully adjusted to equilibrium prices.

Aggregate Demand (AD): AD refers to the total demand for goods and services in an economy at different price levels.

Potential Output: Potential output is the level of real GDP an economy can sustainably produce when all resources are fully employed. It is another term used interchangeably with LRAS.