What Is Short Run Aggregate Supply?

The short-term aggregate supply curve is a curve that reflects the relationship between aggregate supply and price levels in the short-term. In the short term, aggregate supply and price levels move in the same direction, and the aggregate supply curve is a line that slopes to the upper right. This can be explained by sticky wage theory, sticky price theory, and illusion theory.

Short-term aggregate supply curve

The same short-term aggregate supply curve illustrates the relationship between price levels and aggregate supply in the same direction, that is, the price level rises, the aggregate supply increases, and it moves upward along the aggregate supply curve; the price level decreases, the aggregate supply decreases, and Move down. When the price level is not taken into account, the short-term aggregate supply curve also shifts.

The first case is that the short-term aggregate supply curve moves parallel to the right or left due to the long-term aggregate supply curve shift. That is to say, when the input resources increase and technological progress moves an economy's long-term aggregate supply curve to the right, the short-term aggregate supply curve will also move to the right. Conversely, when an economy encounters a natural disaster or other adverse impact, the long-term aggregate supply curve shifts to the left, and the short-term aggregate supply curve shifts to the left.

In the figure above, L A S 0 is the original long-term aggregate supply curve. At this time, the corresponding short-term aggregate supply curve is S A S 0. If the economy increases, the long-term aggregate supply curve moves to the right to L A S 1, and accordingly, the short-term aggregate supply curve also moves to S A S 1. If the economy shows negative growth, the long-term aggregate supply curve moves to the left to L A S 2 and, accordingly, the short-term aggregate supply curve also moves to S A S 2.

The second case is when the price level is constant, the short-run aggregate supply curve moves up or down. The following figure illustrates this situation

In the above figure, the price level is always P 0. When the short-term aggregate supply curve is S A S 0, the total supply is Y 0. If the expected future price level is high and wages increase, the short-term aggregate supply curve moves up to SAS 2 and aggregate supply decreases to Y2 . If one expects that the future price level will be low and wages will decrease, the short-term aggregate supply curve will move down to S A S 1 and aggregate supply will increase to Y 1.

Expectation is one of the important factors that affect the wage level. Changes in expectations will cause changes in wage levels and short-term aggregate supply curve shifts. Similarly, other factors that cause wage level changes or other cost changes will shift short-term aggregate supply curves and affect aggregate supply.