Question

What shape is the long-run aggregate supply curve? Why does it have this shape?

Short answer

The long-run aggregate supply (LRAS) curve is vertical in shape, which indicates that the economy's output is not influenced by changes in the price level in the long run. This is because, in the long run, the quantity of real GDP supplied depends on the economy's total productive resources (capital, labor, and technology) and their productivity, rather than the price level. As all factors of production are assumed to be fully employed in the long run, any change in the price level will not affect the total quantity of output produced in the economy, making the LRAS curve vertical and illustrating that potential output is independent of the price level.

Step-by-step solution

Define Long-run Aggregate Supply Curve

The long-run aggregate supply (LRAS) curve represents the relationship between the quantity of real GDP (Gross Domestic Product) supplied by firms and the price level when the economy has reached its full employment level. In the long run, it is assumed that wages and prices have adjusted to their equilibrium levels, and the economy's resources are fully utilized.

Identify the Shape of the LRAS Curve

The long-run aggregate supply curve is vertical. This vertical shape indicates that in the long run, the economy's output is not influenced by changes in the price level.

Explain Why the LRAS Curve Has a Vertical Shape

The vertical shape of the LRAS curve arises because, in the long run, the quantity of real GDP supplied depends on the economy's total productive resources (capital, labor, and technology) and their productivity, rather than the price level. In the long run, all factors of production are assumed to be fully employed, and the economy is operating at its full employment level of output. Thus, any change in the price level will not change the total quantity of output produced in the economy. This leads to the conclusion that the LRAS curve is vertical, indicating that the potential output of the economy is independent of the price level in the long run. In summary, the long-run aggregate supply curve is vertical in shape because, in the long run, the potential output or real GDP the economy can produce depends on the economy's productive resources and their efficiency, rather than being influenced by changes in the price level.