Answer to Question #80683 in Macroeconomics for Kelvin

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 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

In microeconomics, the basic understanding is that the supply curve should slope upward from left to right when drawn against price; which also applies for the aggregate supply curve. However, the classical aggregate supply curve is vertical. In classical economics, it is assumed that the economy operates at full employment and there is no money illusion. The perfect inelasticity of the classical aggregate supply curve is due to the assumption that the economy is always at full employment despite the changes in price levels. Real production does not change despite the change in product prices.