Question

Supply decisions are made within the business sector and are assumed to be motivated by the desire to maximize profits. Aggregate supply (AS) shows the relationship between the quantity supplied of all goods and services and the price level, ceteris paribus. The aggregate supply curve is believed to be upward-sloping in the short run because many input prices are fixed for a particular time period due to contractual agreements. If the cost of production remains constant and the price level rises, then the price per unit of output sold increases while the cost of producing each unit of output stays the same. This means the profit per unit increases, creating an incentive for producers to increase output. As long as some input prices are fixed, causing costs of production to remain relatively constant, an increase in the price level causes an increase in the quantity supplied of goods and services (holding other things the same); this indicates that the short-run aggregate supply curve (SRAS) is upward sloping. In the long run, aggregate supply behaves differently, does anyone know the shape of the long-run aggregate supply?

Minimum 75 words.

Answer 1

The long-run aggregate supply is not affected by the general price level. This is because in the long run it is assume that the economy is using all its resources fully to their maximum potential and that the economy is using the latest updated technology. given this there can be no change in the level of output unless there is an exogenous shock. produces cannot be motivated to increase production in the long run by increase in the general price level which means that long run aggregate supply curve will be vertical.

however there are several cases in which the long run aggregate supply curve can shift either to the right or to the left. Immigration for example increases the labour force and hence the amount of resources the economy has. this is likely to shift the long run aggregate supply curve to the right. Similarly destruction in the capitalist stock is presumed to be reducing the amount of resources and shifting the long run aggregate supply curve to the left. in both these cases the long run full employment level of output changes.