<p>The main reason why long run aggregate supply is vertical is that in the end the production capacity of every country is limited. In the end there is always some maximum number of number of stuff we can produce (of course, there can be economic growth which expands our production possibilities but the LRAS is basically given by the production possibility frontier that will at every point in time be finite).</p>

<p>However, there is no such restriction on people’s demand. One of the basic assumptions of economics is non-satiation. More is always better than less. However, another basic principle in economics is that marginal utility of consumption is increasing but at a decreasing rate. That is more is always better but the more you have of something the less valuable the thing to you becomes. This is what makes demand decreasing function of price. The thing is that this holds both in short and long term. It’s not like people are only non-satiated in short run, and also it’s not like the marginal utility of consumption increases at decreasing rate only in short run.</p>

<p>Vertical demand curve would basically imply that consumers would never want to buy more of the aggregate product which is certainly not true.</p>

<p>So to sum up, LRAS is vertical because of physical limitation on our production. At some point no matter what’s the price it is not possible to produce more. For example, a writer can only write so much hours in a day so even if someone would offered the writer million euros per hour he or she can never work more than 24h per day (and considering that would kill the person probably I should say not more than max 18h) so the supply will be at some point completely vertical given by the production possibility of the economy. However, no such restriction exists on people’s demand. People’s needs are endless and people will always prefer more to less if the price drops sufficiently (since utility is not increasing at constant but at decreasing rate).</p>

CC BY-SA 4.0
2020-01-31T06:07:48.423Z
2020-01-31T06:07:48.423Z
1muflon1
<p>@1muflon1's answer is "the right" answer in the sense that it is how this discrepancy would be explained in the undergraduate classroom.  However, while it's important to note that the "non-satiation" assumption is necessary to the mathematical definition of "rational preferences", in the real world it is difficult to assert that non-satiation holds for all agents in all cases at all times.  </p>

<p>Once you get into sub-fields concerned with the treatment of externalities or with systems that run up against the bounds of scarcity, assuming non-satiation may be an obstacle to properly understanding real-world problems.  This is prevalent in environmental economics, where relaxing the non-satiation assumption has been used to provide a theoretical grounding to the empirical observation that richer countries tend to devote more resources to securing environmental quality.  This work isn't without controversy, but it is fundamentally at the heart of global climate policy driven by the UNFCCC.</p>

<p>With that in mind, you're still early in your studies.  Take your lessons for what they are: a highly simplified model that is designed to help you develop an intuition for how these systems behave.  The really interesting stuff comes when you start to break these models, and you've already asked an important question along those lines.</p>

CC BY-SA 4.0
2020-01-31T16:08:26.537Z
But isn’t environmental quality treated as a good? In most models I saw environmental quality would be just another good that agents can consume, and sure for many “regular” goods you will have bliss points - like food where more is not necessarily better, but I must say that from macroeconomic perspective I don’t think non-satiation would not hold in real world, especially if you take broad view of what consumption is
1muflon1
CC BY-SA 4.0
2020-01-31T16:33:47.810Z
In environmental / ecological economics non-satiation is a highly questioned axiom.  In the early 2000's, Christopher Lieb and others looked at environmental quality as a substitute for consumption and found that dropping non-satiation in consumption was not only sufficient, but necessary, to explain the shape of the "Environmental Kuznets Curve".  In essence, by splitting the choice set into "consumption goods" and "economic goods", consumption goods behave like Giffen goods beyond a critical income level.
heh
CC BY-SA 4.0
2020-01-31T16:36:24.137Z
What's important to realize is that economics is strange in this sense - we implicitly assume the existence of an infinite reservoir of "value" or "utility", and arrange our math so that this is really what is "consumed".  It is useful in a variety of limited contexts, but at edge cases - such as at the limits of scarcity, or when the externalities from economic activity impinge on the boundaries of physical systems - it can create difficulties.
heh
CC BY-SA 4.0
2020-01-31T15:48:18.807Z
2020-01-31T15:48:18.807Z
heh
<p>To give you a sense of where I am in my understanding of economics, I've just learned about long-run aggregate supply in the neoclassical/monetarist view as a vertical curve. It occurred to me why doesn't the same thing that happens to SRAS happen to aggregate demand over the long run - I'm envisioning that prices adjust in the long-run such that prices have no effect on <em>anything</em>; whether supply, demand, or anything else to do with purchasing habits. By the same reasoning as for aggregate supply, it seems like aggregate demand in the long run is also a graphically a vertical line. In the long run, where wages can adjust to match prices, people will continue buying the same quantity demanded as before just with a higher price level, right? </p>

<p>But I'm assuming, from what I've seen, that we don't differentiate between aggregate demand in the long and short run. What knowledge am I missing? </p>

<p>I'm in SL IB economics and we've just reached macro. I also have a shallow understanding of the Keynesian AS curve. </p>

<long-run><demand>
Why isn't "long-run aggregate demand (or LRAD)" a thing?
Pineapple Fish
# Why isn't "long-run aggregate demand (or LRAD)" a thing?

(Asked by: username_0 on 2020-01-31)

To give you a sense of where I am in my understanding of economics, I've just learned about long-run aggregate supply in the neoclassical/monetarist view as a vertical curve. It occurred to me why doesn't the same thing that happens to SRAS happen to aggregate demand over the long run - I'm envisioning that prices adjust in the long-run such that prices have no effect on *anything*; whether supply, demand, or anything else to do with purchasing habits. By the same reasoning as for aggregate supply, it seems like aggregate demand in the long run is also a graphically a vertical line. In the long run, where wages can adjust to match prices, people will continue buying the same quantity demanded as before just with a higher price level, right?

But I'm assuming, from what I've seen, that we don't differentiate between aggregate demand in the long and short run. What knowledge am I missing?

I'm in SL IB economics and we've just reached macro. I also have a shallow understanding of the Keynesian AS curve.

**Tags:** long-run, demand


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## 2 answers

### Answer by username_1 on 2020-01-31. Score: 5

The main reason why long run aggregate supply is vertical is that in the end the production capacity of every country is limited. In the end there is always some maximum number of number of stuff we can produce (of course, there can be economic growth which expands our production possibilities but the LRAS is basically given by the production possibility frontier that will at every point in time be finite).

However, there is no such restriction on people’s demand. One of the basic assumptions of economics is non-satiation. More is always better than less. However, another basic principle in economics is that marginal utility of consumption is increasing but at a decreasing rate. That is more is always better but the more you have of something the less valuable the thing to you becomes. This is what makes demand decreasing function of price. The thing is that this holds both in short and long term. It’s not like people are only non-satiated in short run, and also it’s not like the marginal utility of consumption increases at decreasing rate only in short run.

Vertical demand curve would basically imply that consumers would never want to buy more of the aggregate product which is certainly not true.

So to sum up, LRAS is vertical because of physical limitation on our production. At some point no matter what’s the price it is not possible to produce more. For example, a writer can only write so much hours in a day so even if someone would offered the writer million euros per hour he or she can never work more than 24h per day (and considering that would kill the person probably I should say not more than max 18h) so the supply will be at some point completely vertical given by the production possibility of the economy. However, no such restriction exists on people’s demand. People’s needs are endless and people will always prefer more to less if the price drops sufficiently (since utility is not increasing at constant but at decreasing rate).


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### Answer by username_2 on 2020-01-31. Score: 0

@username_1's answer is "the right" answer in the sense that it is how this discrepancy would be explained in the undergraduate classroom. However, while it's important to note that the "non-satiation" assumption is necessary to the mathematical definition of "rational preferences", in the real world it is difficult to assert that non-satiation holds for all agents in all cases at all times.

Once you get into sub-fields concerned with the treatment of externalities or with systems that run up against the bounds of scarcity, assuming non-satiation may be an obstacle to properly understanding real-world problems. This is prevalent in environmental economics, where relaxing the non-satiation assumption has been used to provide a theoretical grounding to the empirical observation that richer countries tend to devote more resources to securing environmental quality. This work isn't without controversy, but it is fundamentally at the heart of global climate policy driven by the UNFCCC.

With that in mind, you're still early in your studies. Take your lessons for what they are: a highly simplified model that is designed to help you develop an intuition for how these systems behave. The really interesting stuff comes when you start to break these models, and you've already asked an important question along those lines.

> **Comments:**
> **username_1**: But isn’t environmental quality treated as a good? In most models I saw environmental quality would be just another good that agents can consume, and sure for many “regular” goods you will have bliss points - like food where more is not necessarily better, but I must say that from macroeconomic perspective I don’t think non-satiation would not hold in real world, especially if you take broad view of what consumption is  
> **username_2**: In environmental / ecological economics non-satiation is a highly questioned axiom.  In the early 2000's, Christopher Lieb and others looked at environmental quality as a substitute for consumption and found that dropping non-satiation in consumption was not only sufficient, but necessary, to explain the shape of the "Environmental Kuznets Curve".  In essence, by splitting the choice set into "consumption goods" and "economic goods", consumption goods behave like Giffen goods beyond a critical income level.  
> **username_2**: What's important to realize is that economics is strange in this sense - we implicitly assume the existence of an infinite reservoir of "value" or "utility", and arrange our math so that this is really what is "consumed".  It is useful in a variety of limited contexts, but at edge cases - such as at the limits of scarcity, or when the externalities from economic activity impinge on the boundaries of physical systems - it can create difficulties.  

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