Answer to Question #272361 in Microeconomics for Saman Khalil

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 basic assumption in microeconomics is that, the supply curve should slope higher from left to right when plotted against price; which 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 owes to the notion that the economy is always at full employment, regardless of fluctuating prices. Despite changes in product prices, real production does not alter.