The rise and decline of price levels.
Concept introduction:
Aggregate
Short run Aggregate Supply (SRAS) Curve- The relationship between the quantity of the real GDP supplied by the economy at different price levels in a period when all the factors of production are not variable and increased prices do not culminate into increased input prices, is represented by the Short Run aggregate supply curve or SRAS Curve. This is a
Long Run Aggregate Supply Curve (LRAS) Curve- In the long run with all factors variable, the increased price level translates into higher cost of living and higher input prices. The producers adjust the production levels to meet the increased cost of production. Thus, in the long run the supply does not change in reaction to changes in the aggregate demand. This long run relationship between the Aggregate supply and price level is the Long Run Aggregate Supply (LRAS) Curve and is graphically represented as a straight line parallel to the Y-Axis implying perfect inelasticity of supply.
Long Run Equilibrium and the AS-AD Model- The point of intersection of the short run aggregate supply curve, the long run aggregate supply curve and the aggregate demand curve is studied under the AS-AD Model and depicts the long run equilibrium in the economy.
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