Keynesian Long Run Aggregate Supply Curve

We’ve now seen that there are a few types of aggregate supply curve: 

The first type of aggregate supply curve is the SRAS – which only models aggregate supply in the short run!

And then we have our long run aggregate supply curves: 

One model suggested by the neoclassical economists – the neoclassical el-raz…and another suggested by the Great Keynes – the Keynesian el-raz!

We’ll start with the Keynesian LRAS. 

The Keynesian LRAS looks a bit like a normal supply curve…output slowly increases but then eventually reaches a long run limit. 

Keynes reasoned that at the start, here, when nothing at all is being produced and there are just loads and loads of resources available, it’s super easy to increase output. 

You’ve got all the land and capital you need, loads of unemployed workers looking for jobs…increasing output is easy. 

But as we start producing more and more output…we start running out of resources! Land and capital has been used up, workers are already in jobs…so now it gets a bit harder to increase output.

And then we reach this vertical bit: where an economy can’t produce any more stuff at all because we’ve used up or employed all of the economy’s resources! We literally don’t have the resources to increase output any further. 

So we end up with this bendy Keynesian LRAS curve!

Between 0 and point A, there is spare capacity in the economy – unused resources: freely available land and capital, workers without jobs…and so increasing output is easy. 

But between A and B we reach a bottleneck! A bottleneck is where we start running out of resources because we’ve used up so much of our land, capital and labour already…at a bottleneck, increasing output becomes much harder.

Finally at point B, we reach full employment! The economy can’t produce any more stuff at all because we’ve used up or fully employed allof the economy’s resources! 

So, in summary, The Keynesian LRAS looks like:

The Keynesian takes this kinda bendy L shape!

And that’s because: 

The Keynesian LRAS takes a bendy L shape.

And that’s because initially there’s spare capacity in the economy, nothing’s being produced so there’s loads of spare land, capital and labour – which makes it really easy to increase output.

But then we start running out of resources and hit a bottleneck – so it gets harder to increase output. 

And then finally we reach full employment! The economy can’t produce any more stuff at all because we’ve used up or fully employed all of the economy’s resources! 

Spare capacity, bottleneck, full employment!

You can remember this neatly using “SICK BACK FLIP!” 

Just imagine a scooter bro scooting up the Keynesian LRAS and doing a sick back flip. 

Sick, S, for spare capacity…Back, B, for bottleneck, and flip, F, for full employment. 

Sick back flip – spare capacity, bottleneck, full employment…the three parts of the Keynesian LRAS!