Why the SRAS Curve is Upward Sloping (A Deep Dive)

To understand why the Aggregate Supply curve is upward-sloping in the short-run we will start with focusing on just one point on the AS curve.

Since the price level represents the  prices of final goods and services, when the price level increases, and production cost (especially nominal wages) lag behind price level increases, the ability to earn profits from additional production will incent firms to produce more.

The positive relationship between the price level and the quantity produced is only going to exist in the short-run.  In the long-run, production cost will increase by the same percent the PL has increased. Once this happens production will return to its original level.  Thus, in the long-run, the AS Curve is vertical.

In the long-run, all input prices will fully adjust to changes in the price level.  Therefore, in the long-run, output does not vary with changes in the price level.

This video is made for 1st year college students or AP/IB Economics students.  It focuses on foundational economic concepts.

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