What are the conditions that determine the slopes of the short and long run aggregate supply curves?

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What are the conditions that determine the slopes of the short and long run aggregate supply curves?



Answer: An aggregate supply curve shows the relationship between the quantity of real output supplied (that is, real domestic product) and the average price level of final goods. The slope of the curve depends on what we assume about the way firms expect changes in the prices of final goods to affect input prices. In the long run, it is reasonable to expect input prices to adjust proportionally to changes in the prices of final goods. In that case, firms have no incentive to increase or decrease output, so the long run aggregate supply curve is a vertical line drawn at the economy's natural level of real output. In the short run, actual and expected input prices adjust only gradually to changes in the prices of final goods. Thus, in the short run, firms find it worthwhile to increase both output and prices in response to an increase in demand.

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