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Social Sci LibreTexts

8.2: Growth and the Long-Run Aggregate Supply Curve

  • Page ID
    14089
  • Learning Objectives

    1. Explain and illustrate graphically the concept of the aggregate production function. Explain how its shape relates to the concept of diminishing marginal returns.
    2. Derive the long-run aggregate supply curve from the model of the labor market and the aggregate production function.
    3. Explain how the long-run aggregate supply curve shifts in responses to shifts in the aggregate production function or to shifts in the demand for or supply of labor.

    Economic growth means the economy’s potential output is rising. Because the long-run aggregate supply curve is a vertical line at the economy’s potential, we can depict the process of economic growth as one in which the long-run aggregate supply curve shifts to the right.

    Figure 8.4 Economic Growth and the Long-Run Aggregate Supply Curve

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    Because economic growth is the process through which the economy’s potential output is increased, we can depict it as a series of rightward shifts in the long-run aggregate supply curve. Notice that with exponential growth, each successive shift in LRAS is larger and larger.