Question

2. Explain why the short-run aggregate supply curve is upward sloping?

Answer 1

The short-run aggregate supply curve is upward sloping because as the overall price level in the economy increases, firms are willing to produce more output in the short run in order to take advantage of the higher prices and increase their profits. This is due to the fact that in the short run, many input costs such as wages and raw materials are fixed or inflexible, and so firms may not be able to easily adjust their production levels to meet changes in demand without incurring additional costs. As a result, in the short run, firms are typically able to increase production only by utilizing existing resources more intensively, leading to diminishing returns and higher costs per unit of output. Therefore, as prices rise, firms are willing to produce more output up to a certain point in order to capitalize on the higher prices, leading to an upward sloping short-run aggregate supply curve.