AP Syllabus focus: ‘A shift in LRAS changes the full-employment level of output and signals economic growth or a decline in capacity.’
Economic growth in the AD-AS model is best understood through movements of the long-run aggregate supply curve.
This diagram shows long-run aggregate supply (LRAS) as a vertical line at potential output, with successive rightward shifts (LRAS to LRAS). Each rightward shift represents an increase in full-employment real GDP (potential output) and therefore long-run economic growth. The price level can change, but the key long-run change is the increase in sustainable real GDP. Source
LRAS shifts change an economy’s productive capacity and its full-employment level of real GDP.
LRAS shifts: what they represent
Long-run aggregate supply (LRAS): The relationship between the price level and the quantity of real GDP produced when wages and prices are fully flexible, so output is at full employment.
Because LRAS is vertical at full-employment output (), a shift in LRAS means the economy can sustainably produce more or less real output when fully employed.
Reading LRAS shifts as growth or decline
Rightward shift of LRAS: higher full-employment real GDP ( increases) → economic growth (an expansion of productive capacity).
Leftward shift of LRAS: lower full-employment real GDP ( decreases) → decline in capacity (reduced productive potential).
Causes of LRAS shifts (productive capacity)
Economic growth: A sustained increase in an economy’s potential (full-employment) real GDP, shown in the AD-AS model by a rightward shift of LRAS.
LRAS shifts when the quantity or quality of resources changes, or when the economy becomes more effective at turning inputs into output.
Factors that shift LRAS right (increase capacity)
More/Better labour
population growth, higher labour-force participation, improved education and training (human capital)
More capital
larger and higher-quality physical capital (factories, equipment, infrastructure)
Improved technology
innovations that raise productivity (more output per worker or per machine)
More natural resources or improved access
new energy sources, better extraction methods, improved logistics
Institutional improvements
stronger property rights, efficient financial markets, lower unnecessary regulation (increasing productive efficiency)
Factors that shift LRAS left (decrease capacity)
Loss of labour or skills (emigration, falling participation, severe health shocks)
Capital destruction or reduced investment (war, disasters, prolonged underinvestment)
Resource depletion or restrictions (scarcity, embargoes)
Persistent institutional deterioration (corruption, instability) that lowers productivity and investment
Connecting LRAS shifts to full-employment output ()
When LRAS shifts, the economy’s natural level of real GDP changes. In diagrams, the vertical LRAS line moves:
from to to the right with growth, or
from to to the left with declining capacity.
This is the AD-AS model’s way of showing that the economy’s sustainable “speed limit” has changed, not merely that the economy is temporarily above or below full employment.
Measuring growth (link to potential output)
= Real GDP in the current period (inflation-adjusted output)
= Real GDP in the previous period
In this subtopic, the key idea is that long-run growth aligns with increases in potential real GDP (captured by LRAS shifting right), not just short-run changes in real GDP from AD or SRAS movements.
This AD–AS diagram shows economic growth as aggregate supply shifting right over time (SRAS → SRAS → SRAS) while the vertical LRAS (potential GDP) markers also move right. The equilibrium points move to higher real GDP, illustrating that sustained growth is tied to higher potential output rather than a temporary demand-driven expansion. It also reinforces that long-run growth can place downward pressure on the price level as capacity expands. Source
FAQ
LRAS can shift right if labour productivity increases even with the same headcount.
Drivers include:
better technology and processes
improved management and organisation
higher human capital (training, health)
more capital per worker (capital deepening)
Yes. LRAS shifts are about capacity, not the current price level.
Inflation can occur alongside growth if:
the economy’s productive potential expands (LRAS right), while
aggregate demand also grows strongly.
Capacity can fall due to structural pressures such as:
ageing population reducing labour-force participation
persistent underinvestment in infrastructure/capital
long-term health shocks lowering effective labour supply
resource constraints raising production limitations
Reforms that permanently raise productivity or the quantity/quality of resources shift LRAS. The distinction is timing and durability:
temporary cost changes mainly affect SRAS
lasting improvements in productive potential affect LRAS
A one-time level increase means LRAS shifts right once (higher $Y^*$), but future shifts may return to the old pace.
Faster long-run growth means LRAS continues shifting right more rapidly over time (a higher trend rate of potential GDP growth).
Practice Questions
(2 marks) Explain what a rightward shift of the LRAS curve indicates about an economy’s full-employment level of real GDP.
States that full-employment (potential) real GDP increases / productive capacity increases (1)
Links this to economic growth (1)
(6 marks) Identify two factors that could shift LRAS to the right and, for each factor, explain the mechanism by which it increases full-employment output.
Correct factor 1 identified (1)
Explanation: how factor 1 raises productivity/quantity of resources and increases potential output (2)
Correct factor 2 identified (1)
Explanation: how factor 2 raises productivity/quantity of resources and increases potential output (2)
