Short-Run Aggregate Supply vs Long-Run Aggregate Supply
Short-Run Aggregate Supply and Long-Run Aggregate Supply are two Aggregate Demand & Supply concepts in AP Economics that students often mix up. Short-run aggregate supply is the total supply of goods and services at different price levels, holding factor costs and resource prices constant. Long-run aggregate supply is the total supply of goods and services when all factors of production are fully employed. Here is how they compare side by side.
In the short run, an increase in the price level leads to an increase in the quantity of goods and services supplied. This is because firms can earn higher profits by producing more when prices are higher. The SRAS curve is upward sloping.
In the long run, an economy's potential output is determined by its factors of production, such as labor, capital, and technology. Changes in the price level do not affect the quantity of goods and services supplied in the long run. The LRAS curve is vertical.
SRAS vs LRAS: Why One Slopes and One Does Not
| Short-run aggregate supply | Long-run aggregate supply | |
|---|---|---|
| Shape | Upward sloping | Vertical |
| Located at | Wherever current input prices put it | Full-employment output, also called potential output |
| Why | Some input prices, especially wages, are sticky | All input prices have adjusted, so the price level does not affect output |
| Shifted by | Input prices, productivity, resource availability, expectations, supply shocks | Changes in productive capacity: labour force, capital stock, technology, institutions |
| Effect of a price level change | Moves you along it | No effect on output at all |
| Relationship to unemployment | Output above or below potential means unemployment off its natural rate | Output at potential means unemployment at its natural rate |
Stickiness is the only reason SRAS slopes
In the short run, wages and some other input prices are fixed by contracts, expectations, and habit. So when the price level rises, firms receive more per unit while still paying yesterday's wages, their margins widen, and they produce more. That is the entire mechanism behind an upward-sloping short-run aggregate supply curve. In the long run those contracts are renegotiated and expectations catch up, wages rise in proportion to prices, margins return to normal, and firms produce what their resources allow regardless of the price level. Hence the vertical long-run curve. If you can state that sentence, you can derive every SRAS and LRAS result rather than memorising them.
Different things shift each one, and it is a common trap
A supply shock, an oil price spike, a change in the minimum wage, or a change in inflation expectations shifts SRAS and leaves LRAS exactly where it was, because none of them changes what the economy can produce at full employment. Immigration, capital investment, education, and technological progress shift LRAS, and they shift SRAS too, because more capacity also means more supply at any given price level. So the rule is one way: things that shift LRAS also shift SRAS, but most things that shift SRAS do not touch LRAS. Exam questions test this by describing a temporary shock and asking whether potential output changed. Usually it did not. Set both curves up at /sandbox/adas.
The two curves together define the gaps and the self-correction
Where short-run equilibrium sits relative to LRAS is the definition of a gap: left of it is a recessionary gap, right of it is an inflationary gap. Self-correction is SRAS sliding back toward LRAS. In a recessionary gap, high unemployment eventually pulls wages down, SRAS shifts right, and output returns to potential at a lower price level. In an inflationary gap, a tight labour market pushes wages up, SRAS shifts left, and output returns to potential at a higher price level. Long-run equilibrium is the single point where AD, SRAS, and LRAS all intersect. Being able to draw that three-curve intersection and say what returns the economy to it is the core AP Macroeconomics skill.
Frequently asked questions
Why is long-run aggregate supply vertical?
Because in the long run all input prices, including wages, adjust fully to the price level. Once they have, a higher price level brings proportionally higher costs and no extra profit incentive to produce more, so output is determined by resources and technology alone. That level is potential or full-employment output, and it does not depend on the price level.
What shifts SRAS but not LRAS?
Anything that changes production costs without changing productive capacity: an oil price shock, a change in nominal wages, a change in inflation expectations, or a temporary supply disruption. These move short-run aggregate supply while leaving potential output, and therefore long-run aggregate supply, unchanged.
What is long-run macroeconomic equilibrium?
It is the point where aggregate demand, short-run aggregate supply, and long-run aggregate supply all intersect. Output equals potential output, unemployment sits at its natural rate, and there is no gap. Self-correction is the process by which short-run aggregate supply shifts until the economy reaches that point.
Live AD/AS Model graph. Drag the curves, or open the full version.
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