In the AD-AS model, long-run outcomes depend on the economy’s productive capacity, not the price level. This page explains why LRAS is drawn vertical and what that implies for real output.

Core idea: real output is fixed in the long run

Long-run adjustment of wages and prices

In the long run, nominal wages and other input prices are fully flexible. If the overall price level changes, workers and firms eventually renegotiate wages and contracts so real incentives (purchasing power and real profits) return to where markets clear.

• If the price level rises, firms’ output prices rise at first, but:

  • workers demand higher nominal wages to maintain purchasing power

  • other input costs (rent, interest costs embedded in contracts, intermediate goods prices) adjust upward over time

• If the price level falls:

  • nominal wages and other input prices adjust downward

  • firms’ costs fall along with revenues

Because costs and revenues adjust together in the long run, firms have no lasting reason to produce more or less solely because the price level changed.

Productive capacity determines long-run output

Long-run real output is pinned down by real factors—the quantities and productivity of resources—rather than by nominal variables like the price level.

This diagram highlights that LRAS is vertical at full-employment real GDP, but its position can shift when productive capacity changes. A leftward shift from $Y_f$ to $Y_{f1}$ represents a decrease in potential output due to real factors (resource quantity/quality or productivity), not a change in the price level. Source

A vertical LRAS means the economy has a specific full-employment level of real GDP (often written as $Y^*$) that does not change when the price level changes.

Why “vertical” follows from full flexibility

Price-level changes become “neutral” for real GDP

When wages and prices fully adjust, a higher price level does not permanently increase real purchasing power or real profitability. In effect, the economy can experience a different nominal environment (higher or lower $P$) while producing the same real quantity of output.

The intuition is that long-run equilibrium reflects:

• Labour market clearing at the natural (full-employment) level of employment

• Capital utilisation consistent with normal rates of return

• Technology and productivity that determine how effectively inputs become output

These do not automatically improve just because the price level is higher.

A compact way to express this “real factors determine $Y^*$” idea is:

This representation highlights why LRAS is vertical: changing $P$ does not directly change $K$, $L$ at full employment, or $A$.

The LRAS line: fixed quantity, varying price level

Graphically, a vertical LRAS at $Y^*$ means:

• the horizontal coordinate (real GDP) is fixed at full employment

• the vertical coordinate (price level) can be higher or lower depending on aggregate demand and nominal conditions

• long-run output remains at $Y^*$ because wages and prices fully adjust

In AP terms, this directly matches the specification: the LRAS curve is vertical at full-employment output because wages and prices fully adjust in the long run.

Common interpretation pitfalls (and how to avoid them)

• “Vertical means output can never change.” Output can change, but not because of the price level in the long run. A vertical LRAS specifically says: at any price level, long-run real GDP is $Y^*$.

• “Higher prices automatically mean higher profits and more output forever.” Any short-lived profit increase from higher output prices is competed away as nominal wages and input costs rise too.

• “LRAS is vertical because firms hit capacity in every industry.” The key AP reasoning is not “capacity constraints” alone; it is full wage and price flexibility restoring the economy to full-employment output.