Key terms
- Short-run aggregate supply
- Short-run aggregate supply is the total output firms will produce at each price level while the prices of inputs such as labour and energy stay fixed.
- Long-run aggregate supply
- Long-run aggregate supply is potential GDP, the output an economy can produce by fully employing its labour, physical capital and technology.
SRAS slopes up because output prices rise while input costs stay put
If the prices firms sell at rise while their costs do not, the lure of higher profit leads them to expand production. Far below potential GDP, with many workers idle and factories part-time, a small rise in prices brings a large rise in output, so SRAS is nearly flat. Near potential, firms run into limits and the curve turns steep. For a while firms can even produce above potential, with overtime and machines running all night, but not for long.