Aggregate Supply: Short Run vs. Long Run

Aggregate Supply: Short Run vs. Long Run

Introduction to Aggregate Supply

• Aggregate supply is a fundamental concept in macroeconomics, crucial for understanding Unit 3.

• It involves two distinct curves: Short Run Aggregate Supply (SRAS) and Long Run Aggregate Supply (LRAS).

• The primary differentiator between SRAS and LRAS is the passage of time, which impacts the flexibility of prices and wages.

• Understanding these differences explains why an economy behaves divergently in the short run versus the long run.

Short Run Aggregate Supply (SRAS)

The Concept of Sticky Prices

• Sticky Prices: An official macroeconomic term for prices that are difficult to change quickly in the short run.

  • Examples include wage contracts (e.g., for a year), rent agreements, and contracts for raw materials or other input costs.

  • Reason for stickiness: Predictability in input costs (like wages) aids businesses in planning and budgeting.

• Impact on SRAS: This stickiness causes the Short Run Aggregate Supply curve to slope upward.

  • Sticky input costs and sticky selling prices influence firms to adjust their output in response to changes in the overall price level.

• Simplification: Since wages are often the largest cost for most firms, economists frequently simplify this concept by referring primarily to