Long-run equilibrium is the AD-AS model’s benchmark for a healthy macroeconomy: output equals sustainable capacity, and the economy has no built-in pressure for wages, input prices, or production to keep changing.

Long-Run Equilibrium in the AD-AS Model

What “long-run equilibrium” means on the graph

In the AD-AS diagram, long-run equilibrium is identified by a single point where all three curves meet:

Aggregate demand (AD) intersects short-run aggregate supply (AS/SRAS) at point E, determining an equilibrium price level and real GDP in the short run. The vertical Potential GDP/LRAS line marks full-employment (potential) output, which is the output level consistent with long-run capacity. Long-run equilibrium occurs when the intersection point lies on that vertical line. Source

• The price level on the vertical axis is the equilibrium overall price level.

• The quantity of real output (real GDP) on the horizontal axis equals the economy’s sustainable capacity.

Full-employment level of real output

Full employment does not mean “everyone has a job at all times.” It means the economy is operating at its normal, capacity-consistent level of production.

Core Condition: AD and SRAS Intersect on LRAS

A long-run equilibrium requires two simultaneous equalities:

• Goods market equilibrium in the short run: firms are producing the amount that buyers are demanding at the current price level (the AD–SRAS intersection).

• Consistency with long-run capacity: that intersection occurs exactly at LRAS, the vertical line at full-employment output.

This is why the syllabus phrasing is precise: long-run equilibrium is not just “where AD meets SRAS,” but where that meeting point lies on LRAS.

What Is True When the Economy Is in Long-Run Equilibrium

Output and employment implications

When the intersection occurs on LRAS:

• Real GDP equals potential: the economy is producing at its maximum sustainable level.

• Factor markets are aligned with capacity: the overall use of labor and other inputs is neither unusually high nor unusually low.

• Firms have no broad-based reason to systematically expand or cut production beyond normal because the economy is already at capacity-consistent output.

Price level implication

Long-run equilibrium includes a well-defined equilibrium price level (the vertical coordinate of the intersection). Importantly:

• The level of prices can be higher or lower depending on where AD intersects LRAS.

• Long-run equilibrium does not require a particular price level; it requires capacity-consistent output.

“No pressure to change” intuition

At long-run equilibrium, the economy is at a point where:

• Buyers’ planned spending (AD) is matched by firms’ planned production (SRAS), and

• The resulting production level is exactly what the economy can sustain with fully adjusted wages and input prices (LRAS).

If the economy is not at this point, some combination of output and pricing conditions would be inconsistent with long-run capacity; long-run equilibrium is the state where that inconsistency is absent.

How to Recognise Long-Run Equilibrium Quickly (AP Skill)

Use a checklist approach on any AD-AS graph:

• Find the LRAS vertical line (potential output).

• Locate where AD intersects SRAS (short-run equilibrium).

• Verify whether that intersection lies on the LRAS line.

AD and SRAS intersect at a short-run equilibrium point that lies to the left of the vertical LRAS line, illustrating an economy producing below potential output. The horizontal distance to LRAS is labeled as a recessionary gap, highlighting the diagnostic step of comparing the AD–SRAS intersection to full-employment output. In long-run equilibrium, this gap would be zero because the intersection would occur on LRAS. Source

• If yes: the economy is in long-run equilibrium at full employment.

• If no: the economy is only in short-run equilibrium, not long-run equilibrium.

In AP graphing and explanation, the key phrase to use is: “AD and SRAS intersect on LRAS at full-employment real GDP.”