A Level explanation

The classical AD–AS model uses a vertical LRAS at YFE (full-employment output). In the long run, output is determined by supply-side factors (labour, capital, technology), not aggregate demand.

Short-run equilibrium occurs where AD meets SRAS (point E), giving price level PL₁ and output Y₁. If Y₁ < YFE, there is a negative output gap (spare capacity); if Y₁ > YFE, there is a positive output gap (inflationary pressure).

Use this diagram for Theme 2 essays on demand-side vs supply-side policy, inflation, and the self-correcting mechanism (SRAS shifting back towards long-run equilibrium).