Question

What determines that long run aggregate supply? Why is it vertical?

Answer 1

The relationship between the total output that firms plan to sell during a particular period of time and the overall price level in an economy is explained with the help of aggregate supply. The long run aggregate supply is made up of public goods, capital goods and consumer goods. Factors like higher productivity of labour and capital, capital investment, growing labour supply, demand and supply determine the long run aggregate supply.

Prices are flexible in the long run which also determine the real GDP of a country. The long run aggregate supply curve is vertical when the employment level, production function and technology are functioning at their maximum level of capacity. As in the long run, price is not related to the potential output of an economy which make the production function to work regardless of prices.