Short-run aggregate supply and long-run aggregate supply
Aggregate supply can be split into short-run aggregate supply and long-run aggregate supply.
Short-run aggregate supply (SRAS) is the relationship between real gross domestic product (GDP) and current price levels. It shows the output an economy can manage in the short term at varying price levels.
SRAS assumes that capital levels are inflexible because of fixed costs such as wage contracts, rent agreements and regulated prices – to name a few.
Long-run aggregate supply (LRAS) refers to the theoretical output of an economy if it had a net unemployment of zero – meaning that its workforce is operating at maximum capacity.
LRAS states that aggregate supply is not determined by current price levels or by aggregate demand, but instead is determined by the factors of production including capital, labour and manufacturing technology.
Differences between SRAS and LRAS
The primary difference between SRAS and LRAS is the effect that aggregate demand has on each. In SRAS, capital is fixed, which mean any changes in aggregate demand will affect what a manufacturer can realistically produce in the short-term. As a result, output is unlikely to change drastically.
In LRAS, the assumption is that changes in aggregate demand do not have a lasting impact on the economy’s total output. The only factors which can affect an economy’s output in LRAS are capital, labour and manufacturing technology – because everything else in the economy is taken to be at maximum efficiency.