Economics Aggregate Demand And Supply Questions Medium
The short-run aggregate supply curve represents the relationship between the overall price level in the economy and the quantity of goods and services that firms are willing and able to supply in the short run. It is upward sloping, indicating that as the price level increases, firms are willing to produce and supply a greater quantity of output. This is primarily due to the existence of nominal wage contracts and sticky prices in the short run, which prevent firms from adjusting their input costs immediately in response to changes in the price level. As a result, when the price level rises, firms experience higher revenues and are incentivized to increase production to meet the increased demand. Conversely, when the price level falls, firms reduce their production levels due to lower revenues. Therefore, the short-run aggregate supply curve reflects the positive relationship between the price level and the quantity of output supplied in the short run.