Shifting AD moves an economy around inside its limits. Shifting long-run aggregate supply moves the limits themselves. This is the difference between a busy year and a genuinely richer country, and it is the only kind of growth that lasts.
📘 What you need to know
LRAS shows the potential output of an economy when all its resources are fully employed.
It shifts right when the quantity or quality of the factors of production improves.
The four causes are: more or better factors of production, technological advances, efficiency improvements and changes in institutions.
A rightward LRAS shift is the same event as an outward shift of the PPC.
In the classical model the whole vertical curve moves right. In the Keynesian model the vertical section moves right.
Because supply rises while demand is unchanged, the result is more output at a lower price level.
SRAS factors change costs. LRAS factors change capacity. This is the distinction examiners test most.
The four things that raise potential output
Cause
How it raises capacity
Examples
Quantity or quality of the factors of production
More land, labour, capital or enterprise, or better versions of them. A more skilled worker produces more per hour with the same equipment.
Education and training, immigration policy that raises the labour force, discovering new resources, more machinery
Technological advances
New technology improves the quality of capital, so the same inputs produce more output.
Institutions is the one students skip, and it is often the most powerful of the four. A country can have plenty of land, labour and capital and still produce very little if firms cannot get credit, contracts cannot be enforced, or a few protected firms are allowed to block everyone else. Improving that raises output without adding a single new resource.
The classical picture
Aggregate demand has not moved. The economy can simply produce more than it could before, so output rises and the average price level falls.
The economy starts in long-run equilibrium at AP1 and YFE1.
Something raises potential output, for example better education raising the quality of labour, so LRAS shifts from LRAS1 to LRAS2.
Potential output is now YFE2.
With more supply available and demand unchanged, the new equilibrium is at a lower price level AP2 and higher output.
This is why supply-side policy is so attractive. A demand-side stimulus raises output and pushes prices up. A successful supply-side improvement raises output and pushes prices down. Both goals at once, which no demand-side policy can deliver.
The Keynesian picture
The same improvement in the Keynesian model: the whole curve moves right, so the ceiling on output is now higher.
The logic is identical. Better or more factors of production mean the economy can produce more before it hits full employment, so the vertical section moves from YFE1 to YFE2. The models disagree about how economies behave below full employment, not about what causes capacity to grow.
One honest limitation to keep for evaluation: shifting LRAS right raises the ceiling, but nothing guarantees the economy will reach it. If aggregate demand is weak, a country can have plenty of unused capacity and add more. Supply-side improvement is necessary for long-run growth and not, on its own, sufficient.
SRAS or LRAS? The test
🧩 Deciding which curve moves
Ask: has capacity changed? Can the economy now produce more with everything fully employed?
If yes, it is LRAS. More or better factors, new technology, better efficiency, better institutions.
If no, but costs changed, it is SRAS. Input prices, wages, indirect taxes.
If neither, but somebody is spending differently, it is AD.
Check the timescale in the question. Training a workforce is an LRAS change that takes years, and saying so is worth a mark.
Event
Curve
Why
Energy prices fall sharply
SRAS right
Costs fall, but no new capacity is created
Net immigration raises the labour force
LRAS right
More of a factor of production is available
A rise in VAT
SRAS left
An extra cost per unit for firms
A major new port opens
LRAS right
Infrastructure raises what the economy can produce
A natural disaster destroys factories
LRAS left
Capital has been lost, so capacity falls
Wage settlements come in high
SRAS left
Costs rise with no change in capacity
WORKED EXAMPLE
A government invests heavily in vocational training and new transport infrastructure. Using a diagram, explain the long-run effects on output and the price level. [4]
Step 1: identify the type of changeTraining raises the quality of labour and infrastructure raises the quality of capital, so both raise potential output.Step 2: the shiftLRAS shifts right from LRAS₁ to LRAS₂Step 3: the new equilibriumwith AD unchanged, output rises to a higher Y and the price level fallsHigher real GDP and lower inflationary pressureStep 4: a limitation worth addingBoth take years to work, and the government spending involved carries an opportunity cost. In the short run the extra spending also raises AD.
WORKED EXAMPLE
Explain why an increase in LRAS does not guarantee that real GDP will rise. [3]
Step 1: what LRAS shows
LRAS is potential output: what the economy could produce if all resources were fully employed.
Step 2: what actually decides outputactual output is set by where AD meets AS, not by LRAS aloneStep 3: the consequenceIf aggregate demand is weak, the economy sits below its potential and simply has more idle capacity than before.Raising the ceiling does not make the economy reach itThis is a favourite evaluation point on supply-side policy questions.
💡 Exam tip
Say what happens to the PPC too. Rightward LRAS and an outward PPC shift are the same event, and linking them shows range.
Label YFE1 and YFE2 clearly, with an arrow showing the direction.
Name the factor of production affected. “Improves the quality of labour” beats “makes the economy better”.
Mention time lags. LRAS changes are slow, which limits them as a response to a current recession.
Add the demand-side caveat. Higher capacity is wasted if AD does not follow.
Note the short-run side effect. Government spending on supply-side policy also shifts AD right while it is happening.
⚠️ Common mix-up
Shifting LRAS for a cost change. Cheaper oil is SRAS. It does not build a single new factory.
Shifting LRAS for a demand change. A consumer boom does not raise capacity.
Forgetting LRAS can move left. War, disaster, emigration and capital depreciation all reduce potential output.
Assuming the price level rises. With AD unchanged, a rightward LRAS shift lowers the price level.
Treating supply-side policy as free. It costs money, and that money has an opportunity cost.
Ignoring which model you are drawing in. Vertical LRAS for classical, L-shaped AS for Keynesian, and say which you have chosen.
Up next: Macroeconomic Equilibrium and Output Gaps, where AD and AS finally meet and you find out where the economy actually settles.
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