Discuss the shape of the aggregate supply curve as time moves from the immediate short run, to the short run, to the long run. Why do economists tend to use the short run aggregate supply curve in analysis?

Question

What will be an ideal response?

Answer 1

In the immediate short run, the aggregate supply curve is horizontal at a particular price level. In the immediate short run, prices for firms are fixed because of labor and other resource contracts that fix the price of inputs and contracts with buyers are also fixed.
The short-run curve is relatively flat at low levels of price and output because at that level, resources for production, such as machinery and people, are abundantly available and few shortages occur. Thus the per-unit cost of production does not rise that much as output increases. Past full-employment, resources become scarce and there are diminishing returns to additional capital and labor.
The long-run aggregate supply curve is vertical at the economy’s full-employment level of output. The shape of this curve is determined by flexible input and output prices that allow firms to adjust their profits so as to always have an incentive to produce at the full-employment level of output.
While each curve is appropriate when exploring its time frame, economists tend to focus on the short-run aggregate supply curve. In the real world businesses are often able to make simultaneous changes to their price levels and real output. The only curve that can represent both changes is the short-run aggregate supply curve. The immediate short-run curve holds prices constant and the long-run curve holds output constant, the short-run curve best represents the real world.