Long Run Aggregate Supply Curve Calculations

businessdevelopementmanagerjobdescriptionIn the study of the economy, aggregate supply happens to be the totality of service and goods supply that a natural economy’s firms plan to sell during a specified period of time. It is really the amount total of services and goods that a firm willingly sells at an economy’s given level of price.

Here is a course you might want to check out entitled Micro and Macro Economics which has been approved by the CFA Institute. This course shows you the impact of Economic Variables on the Financial Market and Industry.

Absolutely Vertical

The long run aggregate supply (LRAS) curve is absolutely vertical. Any change in demand aggregate causes only a temporary total output change. The long run is an implementation and planning phase. It is the conceptual period of time where there are no factors of production that are fixed. Usually, aggregate supplies are not adequate for supplying ample opportunity. Often this is equipment considered to be fixed capital. There are nominal variables given when drawing the aggregate supply (AS) curve, such as nominal rate of wages. Only technology, labor and capital affect this curve in the long run because at this point everything in the economy is thought to be optimally used. Here is a course entitled CFA Level 1 Economics that covers the entire Level 1 Economics curriculum though almost eight hours of lectures on video.

Slow Shifting

Like I said, in the longer run, it is just technology, labor and capital that will affect the curve of LRAS since in the economy,  most things are thought to be optimally used. Frequently, LRAS curve is seen as static since it is the slowest shifting of them all (the other two being medium run aggregate supply and short run aggregate supply). LRAS curve is perfectly vertical as this reflects the belief of economists that alterations in demand aggregate only have temporary changes on the total output of the economy. Here is an article entitled Impact of Globalization: The Good, The Bad, The Inevitable that is an introduction to this concept.

Calculating the Long Run Aggregate Supply Curve

To calculate LRAS, the equation used is Y=Y*. In this equation, Y* is the natural production level and Y is the level of economic production.

You can shift LRAS curve when production factors change in quantities. For instance, if the number of labor hours or available workers increases in the long run, the curve shifts outwards. Keep in mind that it is assumed that everyone in the workforce is employed and the labor market is always in equilibrium. In the same way, technological changes can cause the curve to shift by changing the potential outputs from the same input amount in the long run.

In comparison to LRAS curve, short run aggregate supplies increase quantity supply as there is a rise in prices. Draw the aggregate supply curve given some variable nominal such as the nominal rate of wages. In the shorter run, the nominal wages are given as fixed. Thus, higher profits are implied by rising P justifying the output expansion. In the longer run, there are varying nominal wage rates depending on the conditions of the economy. High rates or unemployment lead to falling nominal wage and vice versa.

When the LRAS Curve Shifts to the Right

When does the LRAS curve shift to the right? An increase in aggregate supply shifts the LRAS curve to the right. Economists that are classical claim that the LRAS curve will be vertical.

Classic economists have a belief that in the long run there is an automatic settling of the economy at the full employment income level. If something occurs to increase the economy’s potential of full economy, this shifts the LRAS curve to the right. Causes possible could be an improvement at levels of skill, an increase in productivity or a change in the benefits and tax system.

Here is a course entitled Of Markets and Men: A Visual Introduction to Austrian Economics that studies how real choices made by real people are the only way to make economic sense of the world we live in.

Alternative Models

Alternative models begin with the notion that all economies involve large numbers of input types that are heterogeneous. These include both labor and fixed capital equipment. Both primary input types can be unemployed. The upward AS sloping curve comes about because as there is a rise in output, more processes of production encounter a bottleneck. It is also because some nominal price inputs are fixed in the short run, as in the theory that is neoclassical. Here is a course entitled Economics without Boundaries with David McWilliams that will show you how the global economy really works and what place you happen to have in it, check it out!