Answer to Question #207194 in Macroeconomics for YAR

Question

in microeconomics we expect the supply curve for the firm to slope upward when drawn against price .the classical aggregate supply curve is based on this microeconomic theory of the firm but is vertical.why?

Answer 1

The basic notion in microeconomics is that when plotted against price, the supply curve should slope higher from left to right; this also applies to the aggregate supply curve. The traditional aggregate supply curve, on the other hand, is vertical. The economy is presumed to be at full employment in classical economics, and there is no money illusion.

The traditional aggregate supply curve's perfect inelasticity is owing to the assumption that the economy is always at full employment, regardless of price fluctuations. Despite changes in product prices, real production does not alter.