Answer to Question #286672 in Macroeconomics for Kaira

Question

In microeconomics, we expect the supply curve for the firm to slope upward to the right 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 classical model assumes that the economy is operating at full employment level, human resources are utilized efficiently, all people who want to work are working. The AS curve is vertical because it is inelastic, GDP/real production is independent of the price level changes. Price and wages adapt to the state of the economy. If there is a boom, wages and prices increase and if there is a depression, prices and wages fall.