Graph walkthrough · Macro · Aggregate demand and aggregate supply

Technology raises potential output

A wave of new software raises the output every worker can produce.

Step 1 of 3 · Before the software

The economy is at potential output. The horizontal axis is real GDP and the vertical axis is the price level. E₀ is on LRAS, the most the economy can sustain.

The chain in words

Step 1
Before the software
The economy is at potential output. The horizontal axis is real GDP and the vertical axis is the price level. E₀ is on LRAS, the most the economy can sustain.
Step 2
LRAS and SRAS shift right
Better technology means the same workers and machines produce more. The most the economy can sustain rises, so LRAS shifts right. Producing any output is also cheaper, so SRAS shifts right with it. Firms expand and undercut each other. The economy moves to E₁: more output and a lower price level.
Step 3
Growth without inflation
Both potential and actual output rose, the price level fell, and no gap opened. The same picture describes any rise in the labor force, the capital stock, or productivity.

Takeaway. A rise in productivity shifts LRAS and SRAS right, raising output and lowering the price level.

Draw it yourself

This shock: draw the graph Consumer confidence collapses Government sends stimulus checks An oil price spike

More on the aggregate demand and aggregate supply graph

Confidence collapses Stimulus closes a recessionary gap An oil shock brings stagflation A housing boom overheats The central bank cools an overheating economy An export boom Expected inflation moves supply Austerity cuts demand A stock market crash

Go deeper

Lesson: Aggregate Supply

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.

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