3.3: Aggregate Supply In the Short-Run and the Long-Run
Review section 2 of Aggregate Demand and Aggregate Supply chapter assigned in 3.1, about short run aggregate supply and the way it differs from long-run aggregate supply.
The following videos will walk you through the definitions of Short-Run Aggregate Supply and Long-Run Aggregate Supply. Pay attention to what distinguishes the short-run from the long-run. What causes price and wage stickiness in the short-run and what are the implications for the shape of the supply curves. For example, the short-run aggregate supply curve slopes upward due to the lag between product prices and resource prices that makes it profitable for firms to increase output when the price level rises. The long-run aggregate supply curve is vertical when a country is at full employment. The long-run aggregate supply curve is vertical because, in the long run, resource prices adjust to changes at the price level, which leaves no incentive for firms to change their output. In the long run, prices and wages have no effect on the aggregate supply curve.