long-run aggregate supply

Give the economy enough time and the picture changes. Eventually wage contracts expire, prices fully adjust, and people's expectations catch up to reality. Once everything has had time to settle, how much an economy can produce no longer depends on the level of prices at all — it depends on real things: the number of workers, the stock of machines and buildings, and the state of technology. Long-run aggregate supply describes the total output the economy can sustainably produce once all costs and expectations have fully adjusted.

Drawn as a curve, long-run aggregate supply (LRAS) is a vertical line. The same quantity of output sits at every price level, because in the long run a higher price level just means higher wages and higher costs too — there is no profit incentive left to produce more or less. That vertical line stands at the economy's potential output, also called full-employment output: the amount the economy makes when its resources are used at their normal, sustainable rate (which still includes some natural unemployment). It shifts right only when the real fundamentals improve — more capital, more skilled workers, better technology.

Long-run aggregate supply is what anchors the AD-AS model. In the short run, demand and sticky costs can push actual output above or below this line, creating booms and recessions; but the line itself is the gravity the economy returns to. This delivers the field's central lesson: demand drives output in the short run, but in the long run output is set by capacity, and pure demand pushes show up only as higher prices. The honest caveat is that the long run is a tendency, not a stopwatch — how fast the economy returns to LRAS, and whether deep slumps damage potential itself, are live debates.