Ahmed Kanary IB Economics

There are two LRAS curves, the new classical curve and the
Keynesian curve. In the new classical model, the LRAS curve is
perfectly inelastic because it represents potential output that can
be produced in an economy, when an economy is operating at full
capacity and there is no unemployment. The potential output is
based on the quantity and quality (productivity) of the factors or
production and is independent of the price level. This is why the
LRAS curve is independent of the price level.

In the diagram above, the price level might change from P1 to

P2, but the output level does not change.

The Keynesian curve is that even in the long-run there can be

unemployment above the natural rate.
 Ahmed Kanary IB Economics

Their view of the LRAS curve:

At low levels of output (Real GDP) the LRAS curve is

horizontal or perfectly elastic. This is because with a resulting
high level of unemployment and a lot of spare capacity in the
economy, output can be increased without a rise in costs as more
workers can be recruited at the current wage rates and a rise in
the demand for raw materials and capital will not raise their
price.
Then at higher levels of output the LRAS starts to slope up
as firms begin to experience rises in costs as they have to compete
for increasingly scarce resources (e.g. raw materials & labour).
The price level will rise to compensate for the higher costs.
At the full employment level (maximum potential output),
there is no spare capacity and the LRAS curve becomes perfectly
inelastic.