12.3 Aggregate Supply

What is aggregate supply (AS)?

A curve showing the relationship between the nation’s price level and the amount of real output produced.

What defines the immediate short run in AS?

Both input prices and output prices are fixed.

What does the AS curve look like in the immediate short run?

Horizontal — firms supply whatever is demanded at fixed prices.

What defines the short run in AS?

Input prices are fixed, but output prices can vary.

What does the AS curve look like in the short run?

Upward sloping — higher prices increase profits, so firms produce more.

What defines the long run in AS?

Both input prices and output prices are flexible.

What does the AS curve look like in the long run?

Vertical at full-employment output (Q_f) — price level changes don’t affect output.

Why does the AS curve shape change across time horizons?

Because input prices are stickier than output prices — they adjust more slowly.

What defines the immediate short run in AS?

Both input prices and output prices are fixed.

Why are input prices fixed in the immediate short run?

Wages and contracts lock in costs for months or years.

Why are output prices fixed in the immediate short run?

Firms commit to catalog or annual pricing and must supply at those prices.

What does the AS_ISR curve look like?

Horizontal — firms supply whatever is demanded at the fixed price level.

What causes output to change in the immediate short run?

Changes in total spending — not price level.

What defines the short run in AS?

Output prices are flexible, but input prices are fixed or sticky.

Why does the SRAS curve slope upward?

Rising prices increase profits (with fixed costs), so firms produce more.

The upsloping aggregate supply curve AS indicates a direct (or positive) relationship between the price level and the amount of real output that firms will offer for sale.

What happens when the price level falls in the short run?

Real profits fall → firms produce less → output decreases.

Why is the SRAS curve flat below full employment?

Idle resources allow firms to expand output without raising costs.

Why is the SRAS curve steep above full employment?

Resource shortages and inefficiencies raise costs faster than output.

What defines the long run in AS?

Both input prices and output prices are fully flexible.

What does the LRAS curve look like?

Vertical at full-employment output (Q_f).

Why is the LRAS curve vertical?

Input prices adjust to match output prices, keeping real profits and output constant.

What happens when output prices double in the long run?

Input prices also double → real profits stay the same → output stays at Q_f.

Why don’t firms produce more than Q_f in the long run?

Rising input costs reduce profits and eliminate the incentive to produce beyond full employment.

What is aggregate supply (AS)?

A curve showing the relationship between the price level and real output produced.

What defines the immediate short run?

Input prices and output prices are both fixed.

What defines the short run?

Input prices are fixed, but output prices can vary.

What defines the long run?

Both input prices and output prices are flexible

Why does the AS curve shape change across time horizons?

Because input prices are stickier than output prices — they adjust more slowly.

What is shown by a schedule or curve showing the total quantity of goods and services that would be supplied at various price levels?

Aggregate Supply

What reduces the level of change in input prices in both the immediate short run and the short run?

Contracts