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What is the difference between short run and long run Aggregate Supply

ineedtorevise127

Also what are some examples.
Really struggling to understand this concept

Thanks

Reply 1

dan94adibi

Original post by ineedtorevise127

Also what are some examples.
Really struggling to understand this concept

Thanks

Ok lets give a quick example.
In the short run AT LEAST ONE FACTORS OF PRODUCTION IS FIXED and in the long run they become variable. This is the main difference between SRAS and LRAS.

E.g. imagine you own a factory with 5 people (I know its not realistic).
Suppose you have a contract with them to pay them £5 an hour.
With there is a sudden change in the level of wages these changes will not happen in the short run because you'll have to wait for your employees contract to finish and then in the new contract allow them the new wages.

A better example is factory. Say you want to open a new factory to increase your output. If you decide to open a factory today you won't be able to get it up and running tomorrow morning (maybe you haven't find the right place, cots are high or paper work and act). So this only becomes possible in the long run when you have land available. And hence you will effect the capacity of the economy in the long run.

Reply 2

NidaJaffri

SRAS has spare capacity, we still have resources we can employ and increase our supply. When we reach LRAS - that is full employment. We cannot make anymore, unless we invent a capital or something that increases our potential or resources.

Hope that helps. Good luck :smile:

Reply 3

Homeboy Hotel

LRAS is the long term capacity of the economy. The economy cannot produce anymore in it's long run position compared to the (SR)AS curve which can shift accordingly.

But LRAS can shift too in its own way, but that involves using macro-supply side policies that improves the long term efficiently/competitiveness of the economy. E.G - Welfare reform, Education and Training etc

Reply 4

dan94adibi

Original post by Homeboy Hotel

The economy can still produce more that its capacity in the short run but because its at a disequilibrium it will shift back and it will have an inflationary pressure.

Reply 5

16dan2life

Most of it has been covered by other users.

Production costs affect shifts of the SRAS, such as wages, cost of raw materials etc.
LRAS is affected by, technology changes, increased productivity, anything that'll increase the output of an economy.