What distinguishes LRAS from SRAS?

The distinction between Long-Run Aggregate Supply (LRAS) and Short-Run Aggregate Supply (SRAS) is fundamentally tied to the concept of potential output in the economy. LRAS represents the level of output that an economy can sustain over the long term when all resources are fully utilized and adjusted to their optimal levels. This includes factors such as labor, capital, and technology, which can all be varied in the long run.

In contrast, SRAS reflects the conditions of supply in the short term, where some prices and wages are fixed or sticky. This means that while the economy can adjust production levels in response to changes in demand, it cannot fully adapt all its resources in the short term due to constraints on wages and prices. Therefore, LRAS indicates the potential output when all resources are flexible and can be adjusted accordingly, whereas SRAS is more about the immediate response to demand shocks and price changes.

Recognizing this critical distinction allows for a better understanding of how the economy operates over different time horizons, emphasizing that LRAS is focused on the economy's capacity to produce when it is functioning at full efficiency, free from short-term fluctuations.