Aggregrate Supply in

the Short Run and

Long Run

Views in looking at Aggregrate

Supply
Keynesian (Short Run) upward-sloping;
indicates that firms are willing to increase
their output levels in response to changes in
aggregate demand, particularly when there
is a slack in the economy.
Classical Approach (Long run) the
level of output supplied is independent of
aggregate demand.

WHY IS THERE A
DIFFERENCE BETWEEN
SHORT-RUN AS AND
LONG-RUN AS?

During Short-runs
Some elements of business are inflexible or
sticky.
As a result of this inflexibility, business can
profit from higher levels of aggregate
demand by producing more output.

Potential
Output

Price Level
P
AS

Qp
Real Output

Example!

Wages
Wages adjust slowly when economic conditions
change for a number of reasons.
Workers are less likely to get an increase in their
wages more than once a year.
So firms can adjust the production to suit the
aggregate demand.

However, during long-runs

Eventually, the inflexible or sticky elements of

costswage contracts, rent agreements,
regulated prices, and so forthbecome
unstuck and negotiable.
In the long-run, after all elements of cost have
fully adjusted, firms will face the same ratio of
price to costs as they did before the change in
demand.
The long-run AS curve therefore tends to be
vertical, which means that output supplied is
independent of the levels of prices and costs

Potential
Output

Price Level
P

Qp
Real Output

In short, the key

difference is the time
period of analysis!