Long Run Aggregate Supply - Video Tutorials & Practice Problems

LRAS

So when we talk about aggregate supply we have to talk about aggregate supply in the short run and in the long run separately they're gonna look different on the graph. Let's start with the long run and then we'll do short run in another video. So we're still here in the aggregate demand aggregate supply model. And we're explaining short run fluctuations in GDP and price. But long run aggregate supply is still important because we're gonna have a long run equilibrium and short run equilibrium when we look at the graph together. So let's go ahead and describe long run aggregate supply which we're gonna label L. R. A. S long run aggregate supply right there. So in the long run the quantity of G. D. P. So we'll say real GDP right the amount of quant the quantity of goods um depends on the availability of resources. Right. If we think about the long run, well the amount of GDP we're gonna be able to make in the long run, well it depends on what we have available to make products, right? How much um how much of our factors of production these resources are available. So when we think about real GDP, the goods and services that are being produced? The quantity of goods and services produced in the economy? Well it depends on the availability of these factors of production of these resources. How much labor is there in this economy? How much capital is there? How much natural resources available? Technology, right what's available to to create G. D. P. So you can imagine in the long run we're going to be limited by that by these factors right there's gonna be some total amount that we can produce and we're going to run out of labor, we're gonna run out of capital. There's not gonna be anything left to produce anymore, everything's going to be being utilized. So the current price level does not affect Real GDP. Right? Because when we talk about Real GDP and the reason we use Real GDP is because we're focused on that quantity of goods that we can create. Not just a dollar value of goods because if prices go up well it's gonna look like we have more GDP but we're producing the same amount of stuff. So Real GDP is used is calculated using base here prices so that that doesn't get in the way, right? We're focused on the quantity of goods that are being produced and the only thing that's gonna affect that is the availability of factors of production. So once we have a certain amount of factors of production, the price level doesn't matter. Uh for for the amount we can produce. So remember when we deal with the graph in here in this model, the A. D. A. S. Model price level is on our Y axis and G. D. P. R. Real GDP is here on our X axis. So what does this tell us? So remember that the price level doesn't affect the amount of Real GDP only the amount of factors of production that we have. So if at any point in time we have a certain amount of factors of production. So much. So many people in the economy. Right? The population, the working working force of the economy, the amount of factories and equipment we have in the economy, how educated those people are, how much natural resources like oil or lumber would you know whatever we might have in the economy available. Um The price level isn't going to affect what we can produce in the long run. So what we see is we end up having a straight vertical line for our long run aggregate supply. This is R. L. R. A. S. Is always going to be a vertical line. Why? Because the price level doesn't affect how much we can produce in the long run. Right? No matter what, whether we're have high prices, medium prices, low prices were always able to produce this amount of G. D. P. In the long run, right? This is the G. D. P. In the long run and it's the potential of our society, right? The total potential of our society. If everyone uh if we have full employment and we're utilizing all our resources, this is what we would produce in our in our society regardless of the price level. Okay so the long run average aggregate supply is always gonna be directly straight up and down like this. All right. So this is how we define our long run aggregate supply is based on those available resources, but just like any of our curves, this long run aggregate supply can shift left and shift right for different reasons. And guess what? That might be. It would be because of the factors of production, right? If we have more people in the economy, well, we're gonna have more GDP possible in the long run. If we have smarter people, if we have more natural resources, those are all going to shift our graph. So let's pause here and let's talk about those shifts in the neck.

Shifting LRAS

So let's talk about these different factors of production and how they can affect our long run aggregate supply. So we're gonna talk about good shifts right? Things that can can shift it to the right meaning we'll have more more long run aggregate supply or bad things that can shift it to the left right things that will make it so our economy can't produce as much in the long run. That's a little hard to see. Let me do it in black shift right? And shift left. Okay so labor, the amount of labor that we have in our society, what it comes down to with all of these is if there's more of these factors of production, well then we're gonna be able to shift to the right, if there's less of them we're gonna have to shift to the left. So immigration, right? If there's immigration to us to us a well we would shift to the right, right, there's more people more people available to work. It's gonna shift us to the right and the opposite if people are leaving the U. S. A. And I'm just using us a as an example, it can be any any country, right? There's going to be less less available labor and less long run aggregate supply less we can possibly produce in our economy. Okay so the more people there are simple enough more people, there's more people available to work. How about physical capital? Physical capital? Remember this is the amount of factories, the amount of equipment. So you can imagine if there's more factories that would be a good thing that would shift us to the right? Because there's more factories more productive, more productivity that we can get from all of our labor and less factories, less less available. Um Physical capital would lead to lower aggregate supply. So when I say we're shifting left or right, let me just go to the graph real quick. Just to reiterate, let's say there was immigration to the U. S. They say there's there's a big influx of immigration to the U. S. We would shift this curve to the right to a new long run aggregate supply out here. This would be long run aggregate supply to write this would be one and we would shift it to the right because of one of these underlying factors, right? So that's what would happen. We would shift it to the right or to the left, but it would still be vertical just like that. So, let's go on to the next one here. Human capital. So let's say there's free college, right? Free college education. Well, that makes all of our workers are more technically savvy. They're they're smarter. They're able to be more productive when they're working, right? So the more human capital they have, the more productive they're gonna be, and it's going to shift us to the right and no education, right? If there's no public education or no education available. Well, that's bad. There's they're not gonna be as productive. They're not smart, They're all uneducated people and they're not gonna be able to produce as much. Okay, how about natural resources? So natural resources? What if we uh you know, find an oil deposit right there, find a huge oil deposit and this brings down the price of oil and there's more natural resources available in the in the economy to be used. Well, then we would shift to the right, what if there's a war and we lose key resources, right? We lose maybe, you know, some Russia invades Alaska and takes away Alaska where we have huge oil deposits and we no longer have it anymore. Right? Whatever it might be. Well, if we don't have those, it's gonna shift to the left there. Um last we have technology here. And you can imagine technology generally only moves one way. So more technology, right? If there's some new sort of technological improvement, well, it's gonna shift us to the right, And I don't know, some sort of like catastrophic event that like destroys the internet or something. I don't know what could really lower our technology. That's probably not gonna come come up at all. That be. It's kind of tough to use uh an example for that. But in general technology, if there's new technology more available technology, it's gonna make people more productive, Make things happen quicker and more efficiently and we would shift our long run aggregate supply to the right, okay. So that's how we're gonna deal with long run aggregate supply. Now let's deal with the short run.