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Variables That Move Short Run and Long Run Aggregate Supply Curve

Aggregate supply is a measure of the amount of goods and services an economy is capable of producing at a certain level of price. The short run aggregate supply curve depicts the amount of output that an economy is capable of producing in the short term at various price levels. The short run aggregate supply curve is upward sloping because input prices tend to adjust at a slower rate than that of the final goods; this leads to higher profit, which makes firms to increase production. In addition, the short-term aggregate supply curve is sloping upward as some companies tend to adjust prices at a slower rate than others (Mankiw, 2008). This makes such firms think their sales are increasing and thus increase their production. On the other hand, the long run aggregate supply curve depicts the volume of commodities and services produced by an economy in the long term in relation to different price levels. Unlike the short run aggregate supply curve, the long run aggregate supply curve slopes vertically rather than sloping upwards. In this assignment, short run aggregate supply curve and long run aggregate supply curves together with variables that move them will be discussed. In addition, the macroeconomic equilibrium in the long run and short run will also be discussed.

The short run aggregate supply curve shows a relationship between the volume of commodities and services and price levels that an economy is capable of producing, in the short term. This curve is upward sloping; as the price level rises, firms increase the quantity of commodities and services supplied. Alternatively, as the level of price drops, firms tend to decrease the volume of commodities and services supplied (Mankiw & Taylor, 2006).

Reasons Why the Short Run Aggregate Supply Curve is Upward Sloping

One of the reasons why the short run aggregate supply curve is upward sloping is because of sticky wages. Some economists have a perspective that wages are inflexible, or sticky. This is based on the opinion that wages become locked in for some years because of the labor contracts entered into by employees and management. For instance, the management and labor may reach an agreement of locking in wages for the following one to three years because they may see this as being for their best interest. The management has an idea regarding the cost of labor during the period of the contract while; on the other hand, workers have a sense of security since they know that their wages will not become lowered during the contract period. Besides, wages may also become sticky because of perceived notions of fairness or certain social conventions. When there is a change in the economy, the wages paid to workers, do not adjust immediately because of the contract that exists (Mankiw, 2008). So, when price level increases, the nominal wage remains fixed while the real wage falls since the real wage is based on the purchasing power associated with the wage. A fall in the real wage implies that labor becomes relatively cheaper than before. Firms choose to hire more workers, when labor becomes cheaper which increases their level of production. Therefore, when there is an increase in the price level, output increases due to sticky wages.

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