Answer to Question #219474 in Microeconomics for bobie

Question

Give five reasons why the aggregate supply curve for the short term is upward sloping and the aggregate supply curve for the long term is vertical.

Answer 1

1. In the short run the aggregate supply is graphed as an upward sloping curve because the quantity supplied increases where the price rises.

2. Quantity increases with price because the AS curve is drawn using nominal wage rate. In the short run the nominal wage rate is fixed. Therefore an increasing price indicate higher profits.

3. The AS curve increases because some nominal input prices are fixed in the short run and as output rises more production processes encounter bottlenecks.

4. In the long run the aggregate supply is graphed vertically on the supply curve. This reflects economist's beliefs that changes in AD only temporarily change the economy's total output.

5. In the long run only capital, labor and technology affect AS because everything in the economy is assumed to be used optimally.