Alternative Models of LRAS

Economics: IB Diploma, topic 2.2.7

Different Models of LRAS

There are two models for the LRAS curve. The Keynesian Long-Run Aggregate Supply curve curves upwards. The Classical LRAS is vertical.

The Classical LRAS curve is vertical.
In the long run, when all of an economy's factors of production are being used, the economy is operating on its PPF and is at full capacity. An increase in price, cannot incentivise an increase in output, because output in the economy is maxed out.
The Classical LRAS can be shifted by an increase in the amount or quality of each factor of production.

Keynesian economists build models that have an LRAS that curves upwards.
At low quantities of output, there is a lot of spare capacity. Increases in output use up this spare capacity and they are not inflationary. Unemployed workers are hired and unused factors of production are used.
As output rises, supply starts to become a 'limiting factor'. There could be labour shortages, capital shortages or a shortage of raw materials. This is inflationary, but not impossible to increase output.
Eventually, the economy is at Y_full and all factors of production are being used. The economy is at full output.