Classical Long Run Aggregate Supply (LRAS) content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro to Classical LRAS The Classical LRAS Curve

1. Classical Long
Run
Aggregate
Supply
Lower 6th Macro
Aggregate Supply

2. Intro to
Classical LRAS
Classical Long Run Aggregate Supply
Mr O’Grady

3. Classical Long-Run AS
Long run (Recap): Long run: All factors of production are fully flexible
Classical Economics: emphasises the fact that free markets lead to an efficient
outcome and are self-regulating.
Classical Long Run Aggregate Supply: Classical LRAS is the level of real potential
GDP in an economy, deemed to be constant at all price levels.
Key Assumption: Unemployment can persist in the short-run, but in the long run
flexible wages and prices ensure that the economy operates at the full capacity
Wages (and the other FoP prices) will rise and fall to ensure that there are no surpluses or
shortages of inputs
Full employment will hence occur in the long run, and the maximum sustainable level of
output, YFE, will be made
Key Implication: The classical view suggests that real GDP is determined by supply-
side factors (e.g. the level of I, the level of capital, the productivity of labour, etc.)
In the long-term, an increase in AD (faster than growth in LRAS), will just cause inflation and
will not increase real GDP

4. The Classical
LRAS Curve
Classical Long Run Aggregate Supply
Mr O’Grady

5. The Classical LRAS Curve
Classical LRAS Curve: The Classical LRAS curve graphs the relationship between
potential real GDP and the price level.
Why is the Classical LRAS Curve vertical?
Fully flexible wages and factor input prices means
that the economy always operates at full capacity
regardless of the price level
Movements Along the LRAS Curve: Correspond
to changes in price level,
There is no change in long run output (constant at
YFE)
Shifts of the LRAS curve: Correspond to changes to either the quality or quantity
of the factors of production
Improvements in education and skills
Changes in relative productivity
Changes in government regulations
Demographic changes and migration
Investment
LRAS
RNO
Price
Level
YFE
LRAS
RNO
Price
Level
YFE
A
B
LRAS LRAS2LRAS1
RNO
Price
Level
YFEYFE2 YFE1

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