What causes the aggregate supply curve to have an upward slope in the short run, but a vertical slope in the long run?
What will be an ideal response?
When there is substantial unemployment in the economy and the economy is operating well below the level of full employment, firms can hire more resources, including labor, to increase production without having to raise prices for inputs or wages. The assumption is that prices of inputs are relatively fixed in the short run. Therefore, as prices increase, a firm’s profits will rise on a per unit basis and firms will have an incentive to increase production.In the long run, the economy is at full employment. In this case, there are no extra workers to be found and limits to overtime work are reached. No more increases in output are possible, and the aggregate supply curve becomes very steep or vertical.
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