Drought Destroys Productive Capacity
A multi-year drought destroys resources, shifting LRAS and SRAS left together so the price level rises and potential output itself falls.
Drought Destroys Productive Capacity
AD-AS ModelA multi-year drought destroys resources, shifting LRAS and SRAS left together so the price level rises and potential output itself falls.
Equilibrium at Real GDP (Y) 80, Price Level (PL) 60
Long-run equilibrium
The economy starts in long-run equilibrium, where AD meets SRAS on LRAS. Real GDP is at the full-employment level and the price level is stable.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Students predict what happens before the graph moves. No accounts, nothing graded.
Drought Destroys Productive Capacity, step by step
- 1
Long-run equilibrium
The economy starts in long-run equilibrium, where AD meets SRAS on LRAS. Real GDP is at the full-employment level and the price level is stable.
- 2
Lost resources shift both curves left
The drought destroys farmland, kills orchards and drains water that farms, factories and power plants depend on. Available resources are a determinant of LRAS, so potential output falls and LRAS shifts left. The same lost water and crops raise input costs for producers right now, an SRAS determinant, so SRAS shifts left in the same step. One shock moves both supply curves.
- 3
Price level rises, real GDP falls
AD has not moved, so it now meets the new SRAS at a higher price level and a lower real GDP. Food, water and energy-intensive goods lead the price increases, and the economy simply produces less than it did before the drought.
- 4
Why no recessionary gap opens
Because LRAS moved left along with SRAS, AD still meets SRAS on the new LRAS, so the economy sits at full employment on a smaller LRAS and no recessionary gap opens. That is the difference between one bad harvest, which opens a gap around unchanged potential, and destroyed capacity, which lowers what full employment means.
- 5
Beyond what the graph shows
There is no self-correction to draw here. Falling wages cannot refill a reservoir or replant an orchard, so SRAS does not glide back on its own. Output recovers only when the resources themselves are rebuilt, which takes investment and years, and that is a future rightward shift of LRAS rather than anything on this graph today.
Where it ends up
A permanent loss of resources shifts LRAS and SRAS left together, so the price level rises and real GDP falls, but no recessionary gap opens because potential output itself fell.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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