The long run aggregate supply curve is a vertical line representing an economy’s maximum sustainable output at potential GDP, where all prices and wages have fully adjusted to economic conditions.
What is the Phillips curve in economics?
The Phillips curve is a graphical representation showing that lower unemployment often leads to faster wage growth, originally documented by economist A. William Phillips.
Here’s the thing: it shows an inverse relationship between unemployment and wage changes. For example, if unemployment drops from 5% to 4%, wage growth might jump from 3% to 5% annually as companies scramble to hire scarce workers. This idea shaped economic policy for decades, though its reliability took a hit after the 1970s stagflation period. Now, economists argue this relationship weakens when people’s inflation expectations shift or when supply shocks hit—like when oil prices suddenly spike.
Why is the long-term aggregate supply curve vertical?
The long-run aggregate supply (LRAS) curve is vertical because, in the long run, all prices—including wages and input costs—fully adjust to changes in the overall price level, leaving no incentive for firms to alter output.
Think about it this way: when an economy’s at full employment, production can’t exceed potential GDP, even if prices rise. Imagine every U.S. factory running nonstop with every worker employed—extra demand won’t create more output, just higher prices. That’s the classical view: markets eventually correct themselves. But this assumes no stubborn obstacles like labor market frictions or policy barriers. Changes in tech, workforce size, or capital investment can shift the LRAS rightward, typically boosting potential GDP by 2–3% yearly in developed economies.
