Long-Run Growth: Capital and Technology
Better technology and more capital raise productivity, shifting LRAS and SRAS right together so output rises and the price level falls.
Long-Run Growth: Capital and Technology
AD-AS ModelBetter technology and more capital raise productivity, shifting LRAS and SRAS right together so output rises and the price level falls.
Equilibrium at Real GDP (Y) 80, Price Level (PL) 60
Long-run equilibrium today
The economy starts in long-run equilibrium, where AD meets SRAS on LRAS. Real GDP equals today's full-employment level of output. The question is what happens when the economy's capacity itself changes.
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.
Long-Run Growth: Capital and Technology, step by step
- 1
Long-run equilibrium today
The economy starts in long-run equilibrium, where AD meets SRAS on LRAS. Real GDP equals today's full-employment level of output. The question is what happens when the economy's capacity itself changes.
- 2
Productivity raises capacity and cuts costs
New factories, better machines and improved technology raise productivity, which is a determinant of both aggregate supply curves. More resources and better technology shift LRAS right, because the economy can now produce more at full employment. The same productivity gain lowers per-unit production costs, so SRAS shifts right in the same step. One cause moves two curves.
- 3
Real GDP rises, price level falls
AD has not moved, so it now meets the new SRAS farther to the right and lower down. Real GDP rises and the price level falls. Growth on the supply side is the one way an economy gets more output without paying for it in inflation.
- 4
No output gap opens
Because LRAS and SRAS moved together, AD still meets SRAS on LRAS, so the economy is at full employment, just at a higher potential output. No inflationary gap and no recessionary gap opens. The full-employment level of output has moved, which is exactly what long-run economic growth means and why it is not a business-cycle story.
Where it ends up
Rising productivity shifts LRAS and SRAS right together, so real GDP rises and the price level falls with no output gap. This is long-run growth, not a business-cycle gap.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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