Question

5. Explain the difference between the long-run aggregate supply curve and the short-run aggregate supply curve

Answer 1

price level LRAS SRAS real GDP

The long-run aggregate supply (LRAS) and short-run aggregate supply (SRAS) curves are fundamentally different both in appearance and their components. The SRAS curve is upward sloping and assumes that capital is in the short run is fixed, and only the factors of production that currently exist can be over utilised to increase the level of production to a certain extent. The SRAS curve assumes that a rise in prices will lead to firms employing more workers as it reflects increased demand for the goods and services. The SRAS curve is the one that is affected by any supply-side shocks which may include an increase in the cost of production due to rise in raw material prices.

On the other hand, the LRAS denotes the productive potential of the economy. It is when the SRAS and the aggregate demand (AD) intersect on the LRAS curve, the economy is said to be at natural rate of employment and at steady-state equilibrium. Any positive or negative deviations from this intersection of the SRAS and AD on the LRAS gives rise to inflationary and recessionary gaps. The LRAS considers all factors of production such as total human resource capital stock. The LRAS will move to the right if there is an increase in the productive potential of the economy, which could be realised via an increase in the labour force or technological innovation that increases productivity or to the left if the economy experiences a lasting supply-side shock such as an earthquake or any other natural calamity that could deteriorate the productive potential of the economy.