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Could someone help me with Long run aggregate supply?

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Hey. Economics is not my strongest topic and I really need help with an easy explanation of the LRAS and SRAS.

If I get an easy explanation I can probably figure out the rest on my own so if anyone could help me I would appreciate it sooo much!

Thanks! :rolleyes:

Moa

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LRAS is long run aggregate suply. Basically it's anything that affects factors of production over an extended period of time. For example, workers with lower education levels will have less or no proper training to perform their job. Therefore they will be less productive over the long term and LRAS will decrease.

SRAS is short run aggregate supply. It's anything that affects production over a short time period. This could mean changes in weather conditions, for example. If a region has been experiencing droughts, this would affect crops. There won't be as many crops for that period of time so SRAS will decrease.

It's the best I can do right now, my economics knowledge seems to have promptly left my brain after the exam :rolleyes:

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If you could specify what aspect of SRAS or LRAS you need an explanation for - it would make it easier since the two topics can take pages to explain (in textbooks).

For now:

SRAS: usually drawn with 3 sections (the consensus view) with a horizontal portion, a curved portion, and a vertical portion. The horizontal portion is reflective of economic periods of depression/recession where wages are "sticky downwards". This means that due to high levels of unemployment people would be willing to work more without pushing up wages. So as the AD curve shifts rightward, output increases without affecting price level. The middle section resembles a normal supply/demand interaction (from micro). The vertical section reflects an economy where the factors are being used at the current capacity. So rightward shifts will only increase the price level.

LRAS: reflects the production capacity of the economy at the natural rate of unemployment (vertical).

If the point where the AD curve intersects SRAS (short run equilibrium) is different from the point where it intersects the LRAS (long run equilibrium) an output gap exists. In an inflationary gap there will be pressures on the economy to shift the SRAS left ward to achieve long run equilibrium. The opposite happens in a recessionary gap. Explaining this is easier with a diagram.

A textbook does a better job in explaining these concepts - especially the IB course companion for economics.

Edited by master135

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The best way to look at what shifts the curves is by remembering:-

SRAS: Effected by costs of factors of production i.e. an increase in any of the F.O.P (Factors of production) will shift the sras to the left vice versa.

LRAS: Effected by the qualities/ quanity of F.O.P i.e. supply side policies will shift the curve to the right as it increases the quality or quantity of the F.O.P

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