AD-AS Model
What is AD-AS Model?
The AD-AS model explains real output and the price level as the intersection of aggregate demand and aggregate supply.
Aggregate demand slopes downward, short-run aggregate supply slopes upward, and long-run aggregate supply is vertical at full-employment output. Short-run equilibrium is where AD meets SRAS; long-run equilibrium is where all three curves intersect. It is the central model for analyzing recessions, inflation, and the effects of fiscal and monetary policy.
AD-AS Model: a worked example
Start an economy in long-run equilibrium at price level 100 with real GDP of $800 billion, equal to potential output on LRAS. Government purchases rise by $25 billion and the MPC is 0.8, so the spending multiplier is 1 ÷ (1 - 0.8) = 5 and aggregate demand shifts right by 25 × 5 = $125 billion at every price level. Because SRAS slopes upward, the new short-run equilibrium is not $925 billion. Reading the new intersection gives real GDP of $860 billion at a price level of 105, so roughly half the horizontal shift arrives as output and the rest as a higher price level. The economy now has an inflationary gap of $860 billion minus $800 billion, or $60 billion. In the long run nominal wages rise, SRAS shifts left, and output returns to $800 billion at a price level near 110.
The mistake students make with ad-as model
After shifting AD right by the full multiplier amount, students read new equilibrium output as the old level plus that entire horizontal shift. With an upward-sloping SRAS, part of the increase is absorbed by a higher price level, so equilibrium output rises by less than the shift. The second frequent error is moving a second curve for a single shock. When higher input costs push SRAS left and the price level up, students also drag AD left because buyers face higher prices. That price rise is a movement along AD, already captured by the new intersection, so shifting AD counts it twice.
AD-AS Model questions
What is the difference between short-run and long-run equilibrium in the AD-AS model?
Short-run equilibrium occurs wherever aggregate demand crosses short-run aggregate supply, which can sit to the left or right of potential output. Long-run equilibrium requires all three curves to meet at one point, with output equal to full-employment GDP on LRAS. An economy in short-run equilibrium with an output gap self corrects as nominal wages adjust, shifting SRAS until the three curves intersect together.
How do you show demand-pull inflation on an AD-AS graph?
Shift aggregate demand right until its new intersection with SRAS sits to the right of the vertical LRAS curve. Output and the price level both rise, and the horizontal distance from LRAS out to the new equilibrium is the inflationary gap. Graders normally want the axes labeled price level and real GDP, all three curves drawn, an arrow showing the direction of the shift, and the new price level and output marked with dashed lines.
What shifts SRAS but not LRAS?
Changes in nominal input costs move SRAS alone. A rise in nominal wages, energy prices or per-unit business taxes raises production costs and shifts SRAS left while leaving potential output untouched. LRAS moves only when real productive capacity changes, through the size or skill of the labor force, the capital stock, natural resources or technology. Anything that changes capacity shifts both curves together.
Formula / Example
This is the live AD/AS Model sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated